Slater Diversified Slater Diversied (Slater) is a multi-divisional, diversified company structured around three key divisions, namely: tourism, internet technologies and adventure retailing. The company chief executive officer (CEO} ofthe last five years Katherine Hui has been responsible for a recent restructure that resulted in the creation of the three divisions. The tourism division focuses on providing tourism packages to consumers; the internet technologies division focuses on web-based design and consults on internet usage and marketing; while the adventure retailing division operates in the outdoor, adventure clothing and equipment retailing sector. As the company has grown, the challenge has been to adequately structure such a diversied group. Moreover, developing a suitable managerial control system has proved difcult. For example, as the recently appointed chief financial ofcer {CFO} - Emma Govan - has stated: "these divisions operate in compieteiy different industries with different risks and competitive environments. This makes common, organizationai wide performance measurement and controis probiemutic, particuiariy when we beiieve so strongiy in divisionai autonomy and decentralised decision-making \" Nevertheless, over the years Slater management has tried to use relatively common control system tools. For example, a common planning and budgeting process applies across the organization. Structure, responsibility centre classification and planning Each division is treated as an investment centre with residual income (RI) and sales growth used as key financial performance measures to which incentives are linked. Managers of divisions are also evaluated on the basis of a mix of non-financial measures, though these perform a relatively minor role in performance evaluation. The structure of the incentive and bonus plans within the divisions is up to the divisional manager in conjunction with the CFO. The company has used a traditional approach to budgeting. Senior management is become increasingly frustrated by this annual budgeting process. They have become particularly concerned about the budgeting process for many ofthe support functions such as marketing research, new product/service development, and training; whereby unit managers are usually provided the opportunity to request incremental increases in budgeted expenditure. The budgeted amounts appear to be increasing each year, but management is not convinced of the additional benefits. ACCTBDDDZ Enterprise Performance Management Sample Review Questions Page 14 Tourism division and transfer pricing issue The Tourism division (TD) operates in various sectors of the regional tourism industry. TD sells a diverse range of products including guided tours, accommodation, bicycle hire, entry to key city and regional attractions, adventure activities, and organised 'group' dinners at local restaurants. TD deals with a range of customers including international visitors, local residents and school groups. Currently Tourism is organised into five product-focused profit centres: I Accommodation In Vehicle hire (bikes and cars) I Tours - Adventure I Dining and attractions Within TD, the performance of the managers of each of the five profit centres is evaluated on the prot performance of the individual prot centre. The divisional manager of TD Jenni Hargraves - estimates that about 30% of customers {representing approximately 30% of all business) buy a single product. The remainder typically seek a 'package' deal which might incorporate a mix of two or more of the five tourism products offered by Tourism. For example local school groups buy \"tours\". Country school groups tend to buy packages of "tours + accommodation". International visitors tend to buy more comprehensive packages involving tours, adventure activities, accommodation, vehicle hire and entry to attractions. Local residents are less predictable in their purchasing patterns. Company policy is that whichever profit centre happens to secure the client, puts the package together and records the profit on the whole transaction. The company also mandates that if the package involves services available within Tourism that service must be bought internally. In this sense, there is no sourcing autonomy. The transfer price is set such that all transfers take place at full cost. This policy is designed to make sure that each participating profit centre gains some contribution margin out of each package arrangement, even if they did not directly service the client. At any point in time, all ve profit centres have levels of idle capacity. Olivia Lee, the manager of the 'tours' profit centre is frequently asked by clients to put together "weekend tour\" packages that include a guided tour component as well as car or bicycle hire and accommodation. She provides the following example of a package she recently put together: "Grampians Attractions 2-day tour for 2" Direct costs: Tour guide 180 Costs transferred in from other prot centres: Bicycle hire 50 Accommodation 200 Overheads of Tours profit centre 50 Full Cost $480 Prot margin 25% 120 Selling price $600 Olivia has identified an equivalent tour package offered by a competitor at $550. Olivia has recently experienced frustration at having to reduce her margin on these packages or lose sales. She has been able to obtain the following information from the accommodation and vehicle hire profit centres: - Accommodation: Transferred at the amount the accommodation prot centre pays to the hotel, plus fixed overheads amounting to 25% of direct costs. Thus Olivia determined that the accommodation cost from the hotel must be $160 to arrive at a transfer price of $200. ACCTBDDUZ Enterprise Performance Management Sample Review Questions Page 15 0 Bicycle hire: Costed at a direct cost of $10 per person per day for the use of the bicycle, plus fixed overheads amounting to 25% of direct cost. Thus for two people for two days the cost of bicycle hire is $40 + 25% = $50. Briefly outline why transfer pricing matters. Question 3 a (4 marks} Using the information in the case, outline the key benefits and shortcomings of the Question 3 b existing transfer pricing policy. (6 marks) Briefly outline some relevant options available to senior management to address the concerns expressed about the budgeting process for the support functions. (5 marks) Question 3 d