Renoir Inc. is a medium-sized cosmetics manufacturer that markets many products of personal hygiene. Renoir's Canadian manufacturing operations are split into four divisions: Skincare, Fragrances, soap, and Beauty Products. Although three of these divisions are doing well, the soap division is not very profitable. In recent years, the committee of Renoir's leadership accepted this fact as a necessary evil because soap products are complementary to other product lines. Also, there is no question of abandoning the range of soap products. Today, the management committee is calling on you to analyze in depth the activities of the Soaps division.

The Soaps division is located in a separate building from the Renoir Inc. industrial complex. She includes three production lines respectively producing bar soap, liquid soap, and scented soap. None of the three chains is working at full capacity, but the unused capacity varies from channel to channel. Annex 1 presents data relating to the three production chains.

The chain producing the perfumed soap is completely independent of the other chains. On the contrary, the line producing bar soap can be converted to make liquid soap. Conversely, the line producing liquid soap can also be converted to make bar soap. The conversion of the production of the two types of soap can be done only by section, each serving to manufacture a block of 200,000 units. The cost is $10,000 per section; this cost is amortized over five years. Renoir can convert as many sections of 200,000 units as required.

The Soaps division recently received an offer from another Renoir division. The director of the Europe division, located in France, would like to source a deodorant product that would allow it to make a premium stick antiperspirant. The director of the Europe division has however, mentioned that he would not agree to pay more than $2 per unit of deodorant product. This price corresponds to the price in force on the French market. However, he was open to a long-term commitment. term with the Soaps division if the latter accepts its price. He proposes a first agreement of five years, renewable for another five years. Appendix 2 summarizes the offer of the Europe division.

The director of the Soaps division is undecided. On the one hand, the divisional controller expressed her opinion that the offer of the French director was barely profitable. The comptroller openly admitted to wondering why this transaction would derogate from the rule currently in force at Renoir, which consists in setting transfer price at full cost plus 25%. The controller also pointed out that he seemed ridiculous to grant such a low price to the Europe division which is subject to a tax rate higher than the Canadian divisions. On the other hand, the operations manager has, for his part, points out that the offer is attractive. Currently, the unoccupied space in the plant would allow installing the necessary equipment to manufacture enough deodorant products for the needs of the European division. Additionally, accepting the offer from the Europe division would allow the division We know how to spread common fixed costs over a larger number of units manufactured.

The director of the Soaps division took this opportunity to question the plan of performance-based compensation currently in effect at Renoir. Under this plan, directors of investment centers, such as the Soaps division, receive a bonus when the return on capital investment (ROI) of the division exceeds the corporate target return of 12%. At the start of each year, the Directors must prepare and submit a budget for the fiscal year beginning October 1. The budgets for each division are analyzed by Renoir's vice-president of finance, who accepts generally the budgets as presented. When a division's budgeted ROI is below of the target return of 12%, the vice-president of finance asks the director to make corrections so that the expected profits generate a return at least equal to the target return of 12% %. Over the past few years, the Soaps division has failed to meet its budget and therefore has could not achieve its target performance. The manager of the Soaps division believes that given the particular constraints faced by his division, he should be given a target return less raised. So far, Renoir's management committee has been unresponsive to his arguments.

As an alternative, the director of the soaps division mentioned that she would accept that her division is transformed into a cost center. at Renoir, cost center managers receive a bonus when they reach targets that reflect budgeted costs, but there are no targets common to all divisions, as is the case for investment centers. the director of the soaps division believes that it would be treated more fairly as a cost center since its costs variables are a function of the volume of production, while its fixed costs, excluding administration, are all specific to product lines. according to her, her main task is to minimize the cost variances. finally, she maintains that it would be particularly appropriate to transform her division into a cost center if it were forced to accept the offer from the Europe division at the price offered by this division.

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production capacity (Units) Production Level (Units) Current selling price (per unit) Unit variable cost raw material and workforce variable manufacturing overhead variable selling fee Annual cost Supervisor salaries Amortization Distributed cost (Administation) Annex 1 Bar soap 1 000 000 600 000 1,40$ 0,85 0,15 0,25 45 000$ 10 000 50 000 Liquid soap 800 000 700 000 1,25$ 0,50 0,15 0,25 47 000$ 10 000 75 000 Scented soap 200 000 155 000 2,25$ 1,35 0,15 0,25 41 000$ 35 000 25 000 production capacity (Units) Production Level (Units) Current selling price (per unit) Unit variable cost raw material and workforce variable manufacturing overhead variable selling fee Annual cost Supervisor salaries Amortization Distributed cost (Administation) Annex 1 Bar soap 1 000 000 600 000 1,40$ 0,85 0,15 0,25 45 000$ 10 000 50 000 Liquid soap 800 000 700 000 1,25$ 0,50 0,15 0,25 47 000$ 10 000 75 000 Scented soap 200 000 155 000 2,25$ 1,35 0,15 0,25 41 000$ 35 000 25 000

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Part 1 Assessment of the Soap Divisions profitability Based on the market research results in Appendix 1 the Soap Division is currently not very profitable The divisions selling prices for bar soap an... View the full answer