NASA Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

PROBLEM STATEMENT

When Pierre Choquette got the September Report of Operations of NASA Rubber he called Alf Devereux, controller, Ron Britton, and sales manager into his office to examine the year-to-date results. One week from now, he would make his presentation to the Board of Directors and the results for his division for the initial nine months of the year were not tantamount as anticipated. Pierre realized that the NASA administration group had performed well. Deals volume was up and feedstock expenses were down which brought about a terrible edge that was superior to plan. But still the profits of NASA were not up to the budgeted standard; the problem lied in fixed cost because the fixed cost were high as the volume of butyl transferred to the European division was less than budgeted and the NASA plant was not up to the capacity. It was quite evident that the division had performed well but the indicators could not represent that view because of the fixed cost.

For NASA to be able to show an improved performance, a more realistic transfer pricing has to be derived between NASA and the European division EROW.

Main body

The company is divided into 3 divisions: basic petrochemicals, rubber, and diversified products.

RUBBER GROUP

The Rubber Group was headed by Charles Ambridge, 61 Rubber Group delivered 46% of Polysar profits. Significant contenders included Goodyear, Bayer, Exxon, and Dupont.

Products such as butyl and halobutyl are used in tire manufacturing process, (it is one of the six world's biggest tire companies that represents 70% of the world butyl and halobutyl request).

The Rubber Group was divided in two working divisions: NASA (North and South America) headed by Pierre Choquette and EROW (Europe and rest of world) headed by Doug Henderson, the Rubber Group incorporated a global marketing department and a research division. The expenses of these divisions were not charged on group’s profit.

The first Sarnia plant fabricated customary butyl but it was anticipated that the demand for butyl is going to be steady whereas demand for halobutyl is going to increase. At that time Sarnia plant was changed over to permit creation of halobutyl and also customary butyl.

But in the upcoming years, interest for halobutyl had expanded to the point that Polysar gauge limit requirements. Organization constructed a second plant at Sarnia, known as Sarnia 2, to create customary butyl. The first plant, Sarnia 1, was then devoted singularly to the generation of halobutyl.

Sarnia 2 was built at an expense of $550 million, which started full operations late in 1984. Its yearly nameplate (i.e. outline) generation limit for customary butyl was 95,000 tons. Throughout 1985, the plant created 65,000 tons of customary butyl.

The EROW Division's butyl plant was placed in Antwerp, Belgium. Inherent 1964 as a general butyl unit, the plant was altered in 1979/80 to permit it to create halobutyl and consistent butyl.

The yearly nameplate creation limit of the Antwerp plant was 90,000 tons. In 1985, as in past years, the plant worked close to or at its nameplate limit. The Antwerp plant was worked to take complete care of halobutyl demand of EROW clients; the rest of limit was utilized to deliver general butyl.

In 1981, the plant's yield was 75% normal butyl and 25% halobutyl. By 1985, halobutyl spoke to half of the plant's creation. Since standard butyl interest outpaced the plant's remaining limit; hence, EROW took its customary butyl shortage from the Sarnia 2 plant. In 1985, 21,000 tons of normal butyl was sent from NASA to EROW.

If EROW had taken the complete 21000 tons from NASA, then Sarnia 2 would have been running at its max production capacity; hence, making its fixed overheads completely absorbed that would have showed an improved performance on its 9 months results. This problem can be resolved by using the right type of transfer pricing.

TRANSFER PRICING

Transfer pricing is a costing strategy that is utilized for the determination of the cost of the item at which it is to be exchanged starting with one division then onto the next division of the same organization. It contains three alternatives, cost based exchange evaluating, and market based exchange valuing and negotiated exchange estimating.

cost based transfer pricing and negotiated transfer pricing.

In the cost based transfer pricing there are three options at which the price of the product can be set at the, marginal cost option. In this option, the only thing charged to the other division is the variable cost of the product; full cost option in this option fixed cost is also charged with the variable cost of the product and then there is the cost plus option even with the full cost charged. It is cheaper for the other division to buy it internally .................................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.