Compagnie du Froid, S.A.
1. Calculate the amount of
the bonus pool available under the existing bonus plan. How much would each manager get if that were applied to 2009 results?
2. We want to break down the profit variance into separate components. Part of the reason for this analysis is to determine how profits changed due to factors that are under the control of management, and how profits changed due to factors outside the control of management. Why is this distinction important for performance measurement?
3. We can divide the various differences into two broad categories: Competitive Effectiveness and Operational Efficiency. Competitive effectiveness can be measured by 4 variances: Temperature, Market Share (excluding transfers), Sales Mix, and Product Price. For both the French region and the Italian region (we will look at Spain later), calculate the following:
a. What is the standard contribution per liter of product? (Standard contribution is the budgeted contribution margin divided by the budgeted volume in liters.)
b. How much additional product was sold due to the change in average temperature? What affect did this have on profitability?
c. Market share variance is measured by the change in total volume of product sold, times the standard contribution. What affect did this have on profitability?
d. The budget plan called for 10% of revenue to come from specialty products. What was the actual % of revenue that came from Specialty Products? This calculation is challenging, so I will give you the net effect. For the Italian region, this increased profits by 2,000 Euro. For the French region, this decreased profits by 59,000 Euro. Explain why the shift in product mix between ice creams and specialty products would cause the profit to change.
e. How much of the change in profit came about due to the product price being different? Measure this by looking at the actual sales revenue compared to the expected revenue based on planned prices and actual volumes.
4. The other category of variances, operational efficiency variances, are calculated by comparing the inputs of the raw materials and labor hours compared to the standards for each. Again, the calculations can be challenging, so I am providing the variance amounts for you. For the French region, the operational efficiency variances reduced the profit by 187,000 Euro. For the Italian region, the operational efficiency variance increased profit by 31,000 Euro.
5. There are some miscellaneous variances as well, including the corporate allocation for both regions. For just the French region, there was the effect of the shipments to Spain and the new delivery business. Input these amounts from the case exhibits to the worksheet.
6. The next task for you is to complete the chart found in the posted Excel file. It is the worksheet titled 2009 Performance. Each of the highlighted cells need to be filled in, either with the previous calculations, data from the other exhibits, or new calculations for this page. Note that the chart is asking for the changes to profit as a result of comparing the budget to the actual results. Each input should reconcile the total difference from planned profit to actual profit. When you include this chart in your final report, do not include the entire workbook. Just put this page in your report, likely as an appendix item.
7. Next, identify each variance in the chart as to whether the manager had control over it, or if it was something beyond his control. Determine the operating performance of the manager based on the items he could control. Comment on the operating performance of each manager using this analysis as a base for discussion.
8. Discuss the manner in which the transfer price was determined. Was it a fair way to determine the cost of the transfer? What other methods would you consider? Who has a vested interest in the transfer pricing calculation? Does corporate care? Do the different divisions care?
9. Discuss the strategic implications of the French Division's expanding side business of deliveries. List at least two benefits of doing this and at least two negatives that could happen if this business were expanded.
10. Discuss what the corporate president should do with the Spanish division in regards to the performance evaluation. Calculate a few of the variances and ratios to support your recommendation as to whether the manager did a good job with the situation he was dealing with. How should a manager with an unusual situation such as faulty machinery be evaluated?
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