FINAL EXAM PART B
Pans Distributors, Inc. (P&P) is the distribution company and subsidiary of
Company. P&P buys its pots and pans
from Cookware, its parent company, and markets them through its three regional sales
divisions in North America, Asia and Europe.
the president of P&P has just received the divisional income and product
reports (attached), and is very
disturbed by the very low (1%) profit margin of the company overall, especially
the loss sustained by the European division. His request to Cookware to reduce
transfer prices has been rejected. He
comes to you, a consultant, for help and advice.
interviewing company personnel, you learn that P & P does not prepare operating
budgets with which to plan and control future operations and measure the
performance of its managers. Division managers are paid a fixed salary plus a
bonus based upon increases in total sales revenue over the previous year. You
also learn in your interviews that the equipment used by the European Division
has no alternative use and no resale value.
Write your answers to all questions in Word, and for questions 2 through 6,
calculations in a neat, orderly fashion. Be sure to indicate the question
1. After analyzing the Divisional Income
Statement and the Product report, write a formal memo toP & P’s president
in which you refer to specific percentage differences to identify possible
causes for the poor performance of the European Division. Then, provide a
bulleted listing of possible strategies to be considered with respect to
product selling price, product-mix, planning and control, manager incentives,
and specific cost-saving measures.
(Be sure to
review the facts carefully so that you address all those that are relevant.)
2. Based on its current contribution margin
ratio, how much in ADDITIONAL sales must the European Division achieve in order to at least
cover its fixed costs and break even?
3. How much in ADDITIONAL sales must it achieve
in order to achieve a SEGMENT MARGIN of $25,000
the European Division can increase its sales by 10%, what SEGMENT MARGIN will it achieve, assuming no change in contribution margin
ratio or in fixed expenses?
the European Division cannot make sufficient changes to eliminate losses and
start showing a positive segment margin,
should it be discontinued? Explain why or why not by showing the contribution margin that would be lost vs. the
avoidable fixed costs that would be saved.
Russian company has offered to buy 50,000 pans from the European Division at a
special price of $3.50 each. No sales
commission would be involved. Assuming Cookwear is unwilling to reduce its prices to P & P, should the
European Division accept the offer? Explain why or why not.