Pots and Pans Distributors, Inc. (P&P) is the distribution company and subsidiary of Cookware Manufacturing 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.
John Greer, 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.
Upon 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.
Required: Write your answers to all questions in Word, and for questions 2 through 6, show your calculations in a neat, orderly fashion. Be sure to indicate the question number with each answer.
1. After analyzing the Divisional Income Statement and the Product report, write a formal memo to P & 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
4. If 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?
5. If 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.
6. A 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.