PPT Case WCC.pptx
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Transcript of PPT Case WCC.pptx
Western Chemical Corporation
Division Performance Measurement
Kelompok 5Bayu Ari Bowo
(1506773791)Iga Cindy Pratiwi
(1506774043)Purnellatika Azani
(1506701123)Yuha Nadhirah Qintharah
(1506701376)
OutlineCorporate Profile
Three examples of WCC’s Plants
Q1 : Problems in measuring division performance
Q2 : Alternative methods for measuring division performance
Q3 : Economic Value Added (EVA)StrengthsWeaknesses
Q4 : Measuring Performance of WCC’s Divisions
Q5 : Explanation of WCC’s investment in Czech Republic, Poland, and Malaysia
Corporate ProfileEst. 1920
1995 Fortune 300 chemical company
Products and services: Chemicals and chemical programs for water and waste treatment
Multinational Corporation (MNC) :4.900 employees35 Plants in 19 Countries
WCC as Multinational Firm
WCC
Wholly Owned
Joint Venture
with Local Affiliates
Three examples of WCC’s Plants
Plant in Czech RepublicJoint VentureTotal investment (Total Assets) of
Plant : $35 - $40 millionWCC’s investment : $5 million
(controlling interest)Most of funding are from Debt (60%-
80%) interestFees under technical agreement are
paid by Joint Venture to WCC as a percentage of revenue as an expense by Joint Venture
Three examples of WCC’s Plants (cont’d)Plant in Poland
Wholly owned (100% owned by WCC)Total investment (Total Assets) of
Plant : $40 - $45 million (include working capital)
No External Debt, No minority interest, No Technical Fee
All transfer price from other WCC’s Plants are reasonable
Three examples of WCC’s Plants (cont’d)
Plant in MalaysiaWholly owned (100% owned by WCC)Total investment (Total Assets) of Plant : $35
millionNo External Debt, No minority interest, No
Technical FeeAll transfer price from other WCC’s Plants are
reasonableAdd capacity in Pacific Region and serving the
global market (“swing plant”)
Dimension of Malaysia Plant
Malaysia Plant
RoM
Produce for its Region
Produce for other region
RoS
Sale to Pacific region from its
product
Sale to Pacific region from other Plant’s
Product
Three examples of WCC’s Plants(the 3rd Quarter Reported Income
in 1995)
(in thousand $)Czech (joint Venture)
Poland (Wholly owned)
Malaysia (Wholly owned)Region of
Manufacture Region of Sale
9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE
Revenues 11.510 32.536 12.020 36.052 Cost of sales (9.541) (28.458) (12.392) (26.648)Selling, technical expenses, and
administrative expenses (891) (2.529) (3.775) (4.845)Other income/Other charges (209) (121) (685) (285)Income before interest and taxes 869 1.428 (4.832) 4.274 Interest (1.120) - - - Fees (867) - - - Foreign exchange
(60) 34 - - Income (loss) (1.178) 1.462 (4.832) 4.274 Minority interest 532 - - - Taxes - - - (1.710)Net income (loss) (646) 1.462 (4.832) 2.564 Capital charges 3.600 6.686 Economic value added (8.432) (4.121)
Q1 : Problems in measuring division performance
The Different in Ownership structure differences in reported income (Interest and Technical Fees Expenses)
Plant with 2 dimension function (Region of Manufacture and Region of Sales) Two reported income
Lack of good management reporting system
Other external factor : currency fluctuation, income taxes, local economic condition, legal, political forces, and so on.
Q2 : Alternative methods for measuring division
performance
Difference in ownership structure
Difference in reported income
EBIT as measureme
nt base
Plant with 2 dimensional function
Two reported income
Total incremental
analysis system
External Factors(Currency Fluctuation,
Taxes, and so on)
Difference impact in reported
income among Division
EBIT as measurement
base
Alternative Method :1. Margin
(profitability measurement)
2. Aset Turnover (The effectiveness of assets usage)
3. Division ROI4. Residual Incomeno information about the revenue of Region sales from Malaysia Plant’s Product Region of Manufacture only , instead of use total incremental income.
Q3 : Economic Value Added (EVA)EVA After-tax operating income and Acctual cost of
capital difficult to measure performance of WCC’s Divisions with discussed condition
Strengths Help managers to recognize how they create value the
division create wealth for corporation : Positive EVA; vv.
Weaknesses Using of after-tax operating income misleading in
financial performance measurement of multinational firms’ divisions
Accrual distortions Historical financial data
Q4 : Measuring Performance of WCC’s Divisions
No single ratio or method that can provide the complete picture on how the division is performing
Methods :1. Margin Profitability
2. Aset Turnover The effectiveness of assets usage
3. ROI
4. Residual Income
Q4 : Measuring Performance of WCC’s Divisions (cont’d)
Czech Poland Malaysia
Margin 7,55% 4,39% -40,20%
Assets Turnover 0,31 0,77 0,34
ROI 2,32% 3,36% -13,81%
Residual Income $(2.506.000) $(2.397.000) $(7.982.000)
(in thousand $) Czech (joint venture)
Poland (wholly owned)
Malaysia (wholly owned)
Region of Manufacture
Region of Sale
9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE
Revenues $ 11,510 $ 32,536 $ 12,020 $ 36,052
Income before interest & taxes
$ 869 $ 1,428 $ (4,832) $ 4,274
Avarage operating assets $ 37,500 $ 42,500 $ 35,000
WCC’s investment $ 5,000 100% 100%
Q5 : Explanation of WCC’s investment in Czech Republic,
Poland, and Malaysia
Margin highest profitability : Czech division
Asets TO most effective in asset usage : Poland division
ROI best return on investment : Poland Division
RI all of three divisions had operating income which couldn’t recover WCC’s required return on investment (assume : corporate required rate of return = 12% same with capital charge)
Czech Poland Malaysia
Margin 7,55% 4,39% -40,20%
Assets Turnover 0,31 0,77 0,34
ROI 2,32% 3,36% -13,81%
Residual Income $(2.506.000) $(2.397.000) $(7.982.000)
SuggestionWCC should use total incremental
revenues and costs for evaluating division performance with 2 or more dimensional functions
WCC should not include factors over which manager’s exercise no control
THANK YOU