Company deals with milled flour and a variety of consumer products fromit
Milling and Consumer Division were 2 of 15 Investment centres
Top management of the Medoc Company was convinced that, some wayor the other, the profit performance of the Milling Division and the consumer products division should be measured separately. This was mainly for profit reporting purposes. Transfer of products from Milling to Consumer was done at actual cost 75% of Milling Division’s investment was charged to the consumer product division in computing the latter’s ROI
Distribution of Product
The products were transferred by weight and the sales of these products were done by different departments in the following ratio 70% – Consumer Product division (Retail)
20% – Large Industrial Users
10% – Consumer Products Division to Industrial Users
When operated at capacity, Unit costs were significantly lower, so acceptance of business at a low margin was preferred to operating at less than capacity. The milling division was currently running with 2% surplus capacity. The Consumer Product Division did not participate in any of the decisions regarding Investment in the MillingDivision.Consumer Product Division had to pay for Production Inefficiencies.
What would you recommend given the organizational structure constraints in the case? Answer:-
Since Milling Division is supplying at actual cost, CPD could purchase the surplus capacity of 2%. The Consumer Product Division could increase the volume of consumer sales by increasing its marketing efforts and b offering more attractive special deals. It could also do more to obtain industrial business at a price which, although not profitable, would still result in a smaller loss than what the Milling division currently incurred. This additional volume would benefit the company even though it reduced the average profit margin of the Consumer Product Division.
What would you recommend if there were no organizational structure constraints on your options?
If there were no organizational structure constraints, the transfer price could be revised either to market price or the price charged by the Milling Division to its industrial customers.