Compagnie du Froid S.A. (#s in thousands)
The CEO, Jacques Trumen, of Compagine discusses ambitious growth opportunities and the profit plan for three regions with very competent managers that strive to produce the best results for their division. The Italian and Spanish had favorable product mix variance of 68 and 4,241, respectively. This additional profit both of these regions attained should be looked by Pierre and Andres and determine cost implications on “specialties” as it is generates higher margins. On the contrary, Jean should reconsider next year’s profit plan in “specialties” as it had an unfavorable product mix variance. All regions had a favorable spending variance in “specialties” due to production efficiency and market prices of the ingredients were lower than planned. The unfavorable material and labor variances for both products is due to poor production scheduling (Mostly Spain), under budgeted labor cost for Ice Cream (France and Italy), inventory stock outs (Spain). Recommendations
Though the tension between supplier (France) and customer (Spain) escalated with the current transfer pricing agreement, I believe the agreement of cost plus a 5% profit represents the company’s decentralized strategy, as each manager is responsible for their division’s performance. It was unfortunate that Spain low performance in 1996 was due to inefficiency of new machines and low temperatures, which caused the Spain division to run out of capacity in peak season and forced to import from French division. However, this should not be an indicator of how the Spain division is going to perform in the future as the variance information will educate Andres Molas and will most likely ensure price variances and mix variances are strategically effective. Furthermore, the performance evaluation system can be improved by being based on profits with a 1% fixed bonus to keep tensions low. This will encourage division managers to perform the best...
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