SantoTomas Ltd'

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(No Transcript)
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Santo-Tomas Ltd.

• Partners Meeting
• March 25th, 2004

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The CA Team

• Fahad Sami (aka FUD the CA)

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The CA Team

• Carl Flintoff (aka Flintron)

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The CA Team

• Shane Roose (aka The Bookcooker)

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The CA Team

• Mitch Vaillancourt (aka Sara Wang)

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With A Special Cameo By

• Gabriel Pliska (aka Hugh Jazz Scam, Partner)

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Agenda

• Introduction (Sara)
• Inter-Division Transfer Pricing (Sara)
• Allocation of Costs (Flintron)
• Manager Turnover Performance Evaluation (BC)
• Corporate Staff Members Salary (Fud)
• Valuation of the Decorating Division (Fud)
• Conclusion (Sara)
• Question Period (A complete CA team effort)

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Inter-Division Transfer Prices

• Affects both transferring divisions and the
  company as a whole through its impact on
• divisional performance measures
• companywide profits
• divisional autonomy
• A transfer pricing system should satisfy three
  objectives
• Accurate performance evaluation
• Goal Congruence
• Preservation of divisional autonomy

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Inter-Division Transfer Prices

• Currently, the manufacturing division transfers
  goods to the womens mens divisions at cost
• Also, orders from external customers are
  receiving priority over those from internal
  divisions
• This is due to the manufacturing divisions
  manager wanting to maximize his bonus

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Inter-Division Transfer Prices

• We suggest increasing the transfer price to the
  womens and mens divisions to FMV (or perhaps a
  50 gross margin)
• This will eliminate priority given to any
  customers
• Perhaps bonuses should be based on other
  measures?
• Bookcooker will discuss this later!

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Warehouse Cost Allocation

• Currently, warehouse costs are divided equally
  between the four divisions
• Logically, divisions which have more purchases
  will use more warehouse space
• A system which allocates warehouse costs based on
  purchases would be more appropriate and accurate.

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Warehouse Cost Allocation

• Purchases Revenues Gross Margin 120,000

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Warehouse Cost Allocation
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Allocation of Corporate Expenses

• Currently allocated by charging each division 5
  of their division revenue.
• 2 divisions are very profitable and two arent
• It makes more sense to charge the corporate costs
  to the divisions that can most afford to bear
  these charges.
• Therefore, we recommend corporate expenses be
  charged equally between the more profitable
  womens and decorating divisions and the head
  office.
• Perform a regular review so that if the other
  divisions become more profitable, they can absorb
  some of the costs.

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Gain On Sale of Property

• Is currently overstating S-Ts gross margin
• Is a transaction that is not in the regular
  course of business for Santos-Tomas
• Should be recorded separate from other revenues,
  under the extraordinary portion of the Income
  Statement

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Gain On Sale of Property (contd)

• Overstated revenues overstated net income
• (for the decorating division)
• This results in an extra bonus of 14,500 for the
  manager of the decorating division
• We feel that this gain should not be considered
  when calculating the managers bonus

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High manager turnover

• Bonuses spark short-term extrinsic motivation,
  but are not long-term motivators for managers
• Stock options
• Longer service better deals
• Vacation time
• Longer service more vacation

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Evaluation of division performance

• Net income is only the beginning of evaluation
• Need comparisons and ages
• Calculate gross margin
• Encourages managers to minimize expenses
• Start looking at trends of prior years to help
  forecast

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Evaluation of division performance (contd)

• Goal setting program
• Have managers set goals at beginning of year
• Compare goals to end of year results
• Have bonuses based on the attainment of these
  goals
• If goals were not reached, find out why

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Corporate Staff Members Salary

• Impact
• Currently the decorating divisions managers
  salary is a head office cost.
• As a result, division revenue is over stated,
  which, in turn results in a higher bonus for the
  corporate staff member
• This also results in a misstated gross margin
  figure

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Corporate Staff Members Salary

• Recommendation
• The cost should be assigned to the decorating
  division
• Better reflection of reality
• Representational faithfulness

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Valuation

• First, we need to figure out our projected cash
  flows for the division
• i.e. what we can expect on a yearly basis

• Division Income 274,950
• Less Gain on Sale of Property
  (145,000)
• Less Inter-Division Sales
  (55,000)
• Add Inventory Theft 47,000
• Add Severance 30,000
• Division Income Adjusted for One-Time Items
  151,950
• Less Division Managers Salary (85,000)
• Add Head Office Management Fee
  72,250
• Adjusted Division Income 139,200

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Valuation (Continued)

• Next, we need to determine a reasonable interest
  rate to use for our valuation
• We picked a rate of 8
• Why?
• ST recently borrowed money at that rate
• If ST was to invest the income of the decorating
  division, they could expect to get a return of at
  least that much
• Therefore, we valued the division at
• 139,200 x (1 8) 139,200 x 12.5 1,740,000

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Question Period

• Questions from Ilona
• Questions from Professor Herauf
• Questions from the rest of the class

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Question Period

• Questions from Ilona
• Questions from Professor Herauf
• Questions from the rest of the class