1. BELANGER & SEQUIN

2. Class Announcements  Final Exam 7:00pm April 11, 2014  Leadership Conferences:  1) KPMG Executive Look March 26, 2014 www.kpmgfit.cawww.kpmgfit.ca  2 ) Deloitte Leadership Conference Information Session Wednesday, March 5 – 5:00 to 6:00pm Schwartz 205  Service Learning Assignment:  Progress report is due following client meeting; progress report is a group submission; details or requirements are on-line.

3. Class Objectives 1. Assessing management control systems in context 2. Understanding the impact on behaviour of a evaluation system 3. The evaluation system in context, impact of: 1. Transfer price 2. Responsibility centre designation 3. Investment centre 4. ROA as an evaluation metric

4. Belanger & Sequin : Context  A boat and inboard engine manufacturer  Three divisions:  Engine – concentrated on diesel single engine for the last 5 years; capacity of 8000 hours per year (2 hours per boat)  Boat –labour intensive operation; operated below planned production last year because sales projections were 950 orders lower; capacity is 200,000 DLH  Sales – sole Canadian distributor for new Fujiama sailboats; want to capture growth in recreational boating with a new 20 ft fiberglass sport boat  Falling profits have reduced ROA to 9.3% overall  Resentment is growing among divisions

5. Belanger & Sequin : Issues  1) Assess Divisional Profit  Transfer price between divisions  2) Impact on Overall Profitability  Impact of Fujiama sailboat (1,500)  Impact of 20 foot fiberglass sport boat (1,250)  3) Assessment of Management Control System - Evaluation System  Responsibility centre designation –Investment Centre  Evaluation metrics – Return on Assets (ROA)

6. Belanger & Sequin: Transfer Price  Options for setting Transfer Price:  Current price - $4,100.00  Market price - $5,000.00 Capacity is 8000 hours/ 2 hours per engine is 4,000  Net market prices - $ 4,490 Selling price $5,000 – commission $510 = $4,490  Variable cost - $2,200 DM $800 + DL $1,000 + VOH $400 = $2,200

7. 1. Belanger & Sequin : Profit and ROA by Division (Exhibit #1)

8. 1. Belanger & Sequin : Engine Division (Exhibit #2)  1. What profit if sell all 4000 to external market?  2. What profit is sell only current level externally?

9. 1.Belanger & Sequin : Engine Division Sensitivity Analysis

10. 1.Belanger & Sequin : Boat Division (Exhibit #3)  1. What profit is transfer price was $2,200  2. What profit is sales level was as anticipated  1,750 (800 actual + 950 expected additional)

11. 1.Belanger & Sequin : Boat Division Sensitivity Analysis

12. 1.Belanger & Sequin : Sales Division (Exhibit #4)  1. What profit if redirected sale to BSL at 1,750  (keep total boat sales @ 2,000 in total)

13. 1.Belanger & Sequin : Sales Division Sensitivity Analysis

14. 1.Belanger & Sequin : Overall Analysis

15. 2. New Boat Profitability Analysis

16. 3. Belanger & Sequin: Assessment of Evaluation System  Responsibility centre designation  Investment Centre  Any internal transfer of engines and boast is determined by the sales division estimates of the potential market  Evaluation metrics  ROA  Pretax divisional income divided by assets controlled by the division

17. 3. Belanger & Sequin: Assessment of Evaluation System  Each division is evaluated on ROA  Engine – ROA is 16.5% Commission ($510/engine) on external sales – 4,200 units No commission on internal sales – 800 units Transfer pricing – breaking even on internal sales  Boat – ROA is (10.7%) No commission - internal sales only No outside sales – determined by Sales  Sales – ROA is 12.4% Commission on boats, higher commission on Fujiama Commission on BSL greater than Fujiama

18. Class Objectives - Revisited 1. Assessing management control systems in context 2. Understanding the impact on behaviour of a evaluation system 3. The evaluation system in context, impact of: 1. Transfer price 2. Responsibility centre designation 3. Investment centre 4. ROA as an evaluation metric