case to study

Renoir Inc. is a medium-sized cosmetics manufacturer that markets many products personal hygiene. Renoir's Canadian manufacturing operations are split between four divisions: Skincare, Fragrances, Soaps and Beauty Products. Although three of these divisions are doing well, the soap division is not very profitable. In recent years, the committee of Renoir's leadership accepted this fact as a necessary evil because soap products are complementary to other product lines. Also there is no question of abandoning the range soap products. Today, the management committee is calling on you to analyze depth the activities of the Soaps division.

The Soaps division is located in a separate building from the Renoir Inc. industrial complex. She includes three production lines respectively producing bar soap, liquid soap and scented soap. None of the three chains is working at full capacity, but the unused capacity varies from channel to channel. Annex 1 presents data relating to the three production chains.

The chain producing the perfumed soap is completely independent of the other chains. On the contrary, the line producing bar soap can be converted to make liquid soap. Conversely, the line producing liquid soap can also be converted to make bar soap. The conversion of the production of the two types of soap can be done only by section, each serving to manufacture a block of 200,000 units. The cost is $10,000 per section; this cost is amortized over five years. Renoir can convert as many sections of 200,000 units as required.

The Soaps division recently received an offer from another Renoir division. The director of the Europe division, located in France, would like to source a deodorant product that would allow it to make a premium stick antiperspirant. The director of the Europe division has however, mentioned that he would not agree to pay more than $2 per unit of deodorant product. This price corresponds to the price in force on the French market. However, he was open to a long-term commitment. term with the Soaps division if the latter accepts its price. He proposes a first agreement of five years, renewable for another five years. Appendix 2 summarizes the offer of the Europe division.

The director of the Soaps division is undecided. On the one hand, the divisional controller expressed her opinion that the offer of the French director was barely profitable. The comptroller openly admitted to wondering why this transaction would derogate from the rule currently in force at Renoir, which consists in setting transfer price at full cost plus 25%. The controller also pointed out that he seemed ridiculous to grant such a low price to the Europe division which is subject to a tax rate higher than the Canadian divisions. On the other hand, the operations manager has, for his part, points out that the offer is attractive. Currently, the unoccupied space in the plant would allow install the necessary equipment to manufacture enough deodorant product for the needs of the European division. Additionally, accepting the offer from the Europe division would allow the division We know how to spread common fixed costs over a larger number of units manufactured.

The director of the Soaps division took this opportunity to question the plan of performance-based compensation currently in effect at Renoir. Under this plan, directors of investment centers, such as the Soaps division, receive a bonus when the return on capital investment (ROI) of the division exceeds the corporate target return of 12%. At the start of each year, the Directors must prepare and submit a budget for the fiscal year beginning October 1. The budgets for each division are analyzed by Renoir's vice-president of finance, who accepts generally the budgets as presented. When a division's budgeted ROI is below of the target return of 12%, the vice-president of finance asks the director to make corrections so that the expected profits generate a return at least equal to the target return of 12% %. Over the past few years, the Soaps division has failed to meet its budget and therefore has not could not achieve its target performance. The manager of the Soaps division believes that given the particular constraints faced by his division, he should be given a target return less raised. So far, Renoir's management committee has been unresponsive to his arguments.

As an alternative, the director of the soaps division mentioned that she would accept that her division is transformed into a cost center. at renoir, cost center managers receive a bonus when they reach targets that reflect budgeted costs, but there are no targets common to all divisions, as is the case for investment centers. the director of the soaps division believes that it would be treated more fairly as a cost center since its costs variables are a function of the volume of production, while its fixed costs, excluding administration, are all specific to product lines. according to her, her main task is to minimize the cost variances. finally, she maintains that it would be particularly appropriate to transform her division into a cost center if it were forced to accept the offer from the europe division at the price offered by this division.

-As assistant to the controller, prepare a report in Word format with calculations in XLS:

Your report should include an assessment of the Soap Division's profitability based on market research results which appear in Appendix 1 (Part 1). It should also include a recommendation on the offer of the Europe division (part 2). You should discuss the issues raised by the director of the Soaps division regarding the structure of the company and the plan of remuneration (part 3). Discuss any other management practices that appear to you problematic in Renoir (parts 4, 5 and 6).

1. Analysis of the soaps division
2. Offer from the Europe division
3. Transfer pricing policy
4. Performance measurement at Renoir
5. Nature of responsibility centers
6. Approaches to establishing the budget and performance measurement force at Renoir
7. Style and professionalism of presentations

Annex 1 Bar soap Liquid soap Scented soap production capacity (Units) 1 000 000 800 000 200 000 Production Level (Units) 600 000 700 000 155 000 Current selling price (per unit). 1,40$ 1,25$ 2,25$ Unit variable cost raw material and workforce 0,85 0,50 1,35 variable manufacturing overhead 0,15 0,15 0,15 variable selling fee 0,25 0,25 0,25 Annual cost Supervisor salaries 45 000$ 47 000$ 41 000$ Amortization 10 000 10 000 35 000 Distributed cost (Administation) 50 000 75 000 25 000 the marketing department informs you that a recent market study has concluded that it is currently impossible to change the volumes and selling prices of bar soap and scented soap. The study collected the following data on the price and volume of bar soap and liquid soap products: Bar soap Liquide soap Units Unit selling price Units Unit selling price 900 000 1,25$ 1 500 000 1,00$ 600 000 1,40 1 300 000 1,10 500 000 1,50 1 250 000 1,15 400 000 1,60 900 000 1,20 250 000 1,75 700 000 1,25 Annendix 2 Appendix_2 data relating to the five-year wait proposed by the Europe division Air fresheners Investment required 1 350 000 $ Annual sales volume (number of units) 275 000 Unit selling price 2,00$ Unit variables cost direct cost - raw materials and workforce 1,20 variable manufacturing overhead 0,15 variable transport costs 0,20 Fixed cost Supervisor salaries2 40 000$ Amortization 40 000 Distributed cost (Administation) 25 000 Notes: 1- this investment makes it possible to manufacture 300,000 units of deodorant products per year 2- To fulfill this order, the director of the soap division will have to hire a person who will supervise the operations making it possible to manufacture the air freshener Work to do: -As assistant to the controller, prepare a report in Word format with calculations in XLS: Your report should include an assessment of the Soap Division's profitability based on market research results which appear in Appendix 1 (Part 1). It should also include a recommendation on the offer of the Europe division (part 2). You should discuss the issues raised by the director of the Soaps division regarding the structure of the company and the plan of remuneration (part 3). Discuss any other management practices that appear to you problematic in Renoir (parts 4,5 and 6). 1- Analysis of the soaps division 2- Offer from the Europe division 3- Transfer pricing policy 4- Performance measurement at Renoir 5- Nature of responsibility centers 6- Approaches to establishing the budget and performance measurement force at Renoir 7- Style and professionalism of presentations Annex 1 Bar soap Liquid soap Scented soap production capacity (Units) 1 000 000 800 000 200 000 Production Level (Units) 600 000 700 000 155 000 Current selling price (per unit). 1,40$ 1,25$ 2,25$ Unit variable cost raw material and workforce 0,85 0,50 1,35 variable manufacturing overhead 0,15 0,15 0,15 variable selling fee 0,25 0,25 0,25 Annual cost Supervisor salaries 45 000$ 47 000$ 41 000$ Amortization 10 000 10 000 35 000 Distributed cost (Administation) 50 000 75 000 25 000 the marketing department informs you that a recent market study has concluded that it is currently impossible to change the volumes and selling prices of bar soap and scented soap. The study collected the following data on the price and volume of bar soap and liquid soap products: Bar soap Liquide soap Units Unit selling price Units Unit selling price 900 000 1,25$ 1 500 000 1,00$ 600 000 1,40 1 300 000 1,10 500 000 1,50 1 250 000 1,15 400 000 1,60 900 000 1,20 250 000 1,75 700 000 1,25 Annendix 2 Appendix_2 data relating to the five-year wait proposed by the Europe division Air fresheners Investment required 1 350 000 $ Annual sales volume (number of units) 275 000 Unit selling price 2,00$ Unit variables cost direct cost - raw materials and workforce 1,20 variable manufacturing overhead 0,15 variable transport costs 0,20 Fixed cost Supervisor salaries2 40 000$ Amortization 40 000 Distributed cost (Administation) 25 000 Notes: 1- this investment makes it possible to manufacture 300,000 units of deodorant products per year 2- To fulfill this order, the director of the soap division will have to hire a person who will supervise the operations making it possible to manufacture the air freshener Work to do: -As assistant to the controller, prepare a report in Word format with calculations in XLS: Your report should include an assessment of the Soap Division's profitability based on market research results which appear in Appendix 1 (Part 1). It should also include a recommendation on the offer of the Europe division (part 2). You should discuss the issues raised by the director of the Soaps division regarding the structure of the company and the plan of remuneration (part 3). Discuss any other management practices that appear to you problematic in Renoir (parts 4,5 and 6). 1- Analysis of the soaps division 2- Offer from the Europe division 3- Transfer pricing policy 4- Performance measurement at Renoir 5- Nature of responsibility centers 6- Approaches to establishing the budget and performance measurement force at Renoir 7- Style and professionalism of presentations