Question
Rikyu Limited is a multinational company with headquarters in Australia and two subsidiaries in the Pacific region. This company manufactures high priced ceramic equipment for
Rikyu Limited is a multinational company with headquarters in Australia and two subsidiaries in the Pacific region. This company manufactures high priced ceramic equipment for use in tea ceremony. The main input is raw clay. Managers are allowed to bid separately and compete against each other for sales contracts. The clay can be obtained on the local spot market for $206 per ton, or from the parent companys plant in Sydney, Australia for $301 per ton. These are the amounts that would be shown in the subsidiaries books. However, when raw clay is purchased from Australia, the cost shown in the parent companys records (not for manager display) is not $301 but $199. Conversion costs are $92 per ton (Japan) and $32 per ton (New Zealand). A chart framework to examine bid possibilities for the same sales contract is presented below. The winning bid was obtained by Japan with a bid sales price of $619 per ton of clay. Japan based its bid by buying the raw clay at the local market. New Zealand with a bid sales price of $865 per ton of clay lost the bid. New Zealand (NZ) based its bid on buying the clay from its parent company in Australia at $301 per ton. All costs shown include freight. The company currently evaluates each subsidiary as a profit centre. Required: Evaluate whose bid was in Rikyu Ltds best interest by completing the chart below and interpreting the results. (15 marks)
| Subsidiaries | Corporate | ||||
Country | JAPAN (SPOT) | JAPAN (AUS) | NZ (SPOT) | NZ (AUS) | JAPAN (AUS) | NZ (AUS) |
REVENUE |
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COST OF SALES: |
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RAW CLAY |
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OTHER VARIABLE |
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COSTS (VC): |
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CONTRIBUTION |
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