Growth opportunities are always accompanied by challenges," exclaimed the CEO of GeoBab. She then went on to explain why you, a consultant, were hired. GeoBab started business in the city of Waterloo in 1951 as a manufacturer of televisions and electrical products. Television manufacturing was discontinued in the 1970s. GeoBab remained in the electrical products business, which over time required it to enter many new markets. New products had to be constantly developed to maintain growth. The life of many of those products was short, and thus many products were exited after a few years. In addition, competition and the need to be cost effective obliged GeoBab to locate new plants in China and India, and to enter into outsourcing arrangements. Along the way, GeoBab also acquired about 30 small manufacturing plants. The result has been that GeoBab now has 36 plants worldwide. Systems integration attempts were a constant challenge because of acquisitions, outsourcing arrangements, and new product implementations. If there had been a uniform enterprise resource planning (ERP) System, the CEO said, there would have been fewer problems for you to resolve. Sung, one of the older, larger divisions, has been subject to a series of problems, which the division's general manager and his controller have not been able to resolve. The CEO introduced you to the general manager and the controller. They explained that the sales have been lagging behind expectations, with the recently completed year being typical of the last three. A bigger problem has been that for the first year in decades, actual profits have become negative. You are shown the operating statement in Exhibit I. After a quick review of the operating statements, you asked if there have been any changes to the manufacturing process. You were told that the only change has been the use of a new supplier for the major components. The new supplier, EL Manufacturing, was an acquisition by GeoBab that occurred late in the previous year. The acquisition was premised largely on EL being able to replace most of Sung's existing suppliers. The components from EL have defects, whereas the previous suppliers provided defect free components. Consequently, more materials and labour were needed, and rework and spoilage were charged to overhead. You ask for information on the cost of quality and customer satisfaction, and you receive the information shown in Exhibits 2 and 3. You are also informed by the divisional general manager that EL wants a higher price for the components being supplied to Sung. The general manager at Sung is opposed to any increase in price paid to EL because the market price is less than what EL currently charges. (You confirm with an independent source that EL is presently charging Sung five percent over the market price for the components.) Two days later, the CEO introduces you to the general manger of EL. The financial statements for EL are contained in Exhibit 4. You learn that all of EL's production goes to Sung at a markup Page 2 of 4 over costs sufficient to yield a 20 percent ROI, which is GeoBab's markup for setting transfer prices between divisions. This arrangement started at the beginning of the year that just ended. The general manager of EL wants the markup to be increased in order to earn a 25 percent ROI, which he says is consistent with what is earned by other, independent firms making the same components. (You confirm that those other firms were earning 25 percent ROIs.)

Required Using the Case approach shown at the beginning, respond to the CEO's assignment to resolve the outstanding issues. Please make sure to include an executive summary.

Exhibit 1 SUNG ELECTRONICS DIVISION Operating Statement For the Year Ending December 31 ( millions of dollars) Budget Actual Sales 842.0 823.8 Variable cost Direct materials, components 270.2 281.0 Direct labour 34.8 47.8 Manufacturing overhead 78.0 110.6 Selling 38.4 38.2 421.4 477.6 Contribution margin 420.6 346.2 Fixed expenses Manufacturing overhead 196.4 264.4 Selling 42.4 42.2 Administration 74.4 74.6 313.2 381.2 Net operating income 107.4 (35.0) SUNG ELECTRONICS DIVISION Modified Balance Sheet As at December 31 (millions of dollars) Actual Working capital 57.3 Net fixed assets 153.2 Investment 210.5 ROL %% (16.7)Exhibit 1 SUNG ELECTRONICS DIVISION Operating Statement For the Year Ending December 31 ( millions of dollars) Budget Actual Sales 842.0 823.8 Variable cost Direct materials, components 270.2 281.0 Direct labour 34.8 47.8 Manufacturing overhead 78.0 110.6 Selling 38.4 38.2 421.4 477.6 Contribution margin 420.6 346.2 Fixed expenses Manufacturing overhead 196.4 264.4 Selling 42.4 42.2 Administration 74.4 74.6 313.2 381.2 Net operating income 107.4 (35.0) SUNG ELECTRONICS DIVISION Modified Balance Sheet As at December 31 (millions of dollars) Actual Working capital 57.3 Net fixed assets 153.2 Investment 210.5 ROL %% (16.7)