University of San Jose-Recoletos

Magallanes Cebu City, 6000

1st Semester 2014- 2015

Management
Report
Prepared by:
Ma. Grace Batingal
Jeanly Margrett Ceniza
Kristine Del Campo
Lieza Mae Mayol
Dianne Rio Sanchez

Attached herein are the substantial documents for the Managements Report and
Consideration in response to the findings set out in the investigation report dated October 7,
2014.

PURPOSE
An extensive study about the entitys undertaking signifies an important role to
the companys success. In this specific course of action, an assistance is provided to
the entity to give them an ounce of information that would manifest a due influence
to the managements ability to decide. It serves as a map that the company may ought
to follow. A trail that would may lead them to the proper projections of outcome,
which will then serve as a key to the companys success.

MANAGEMENT REPORT AND RECOMMENDATION

for GREENWORLD, Inc.

Background
Greenworld, Inc. is a nursery products firm. It has three divisions that grow
and sell plants: the Western Division, the Southern Division, and the Canadian
Division. Recently, the Southern Division of Greenworld acquired a plastics factory
that manufactures green plastic pots. These pots can be sold both externally and
internally. Company policy permits each manager to decide whether to buy or sell
internally.
The Western Division had bought its plastic pots in lots of 100 from a variety of
vendors. The average price paid was P78 per box of 100 pots. However, the
acquisition made Rosario Sanchez-Ruiz , manager of the Western Division, wonder
whether or not a more favorable price could be arranged. She decided to approach
Lorne Matthews, manager of the Southern Division, to see if he wanted to offer a
better price for an internal transfer. She needs 3,500 boxes. Capacity for the
Southern Division is 20,000 and normally sells its pots for P 80 per box of 100 pots.
Lorne gathered the following information regarding the cost of a box of 100 pots:

Direct materials
Direct labor
Variable Overhead
Fixed overhead

P35
P18
P10
P10*

* Fixed overhead is based on P 200,000/20,000 boxes.

Selling Price
P75
Production Capacity
20,000 boxes

FINDINGS
Suppose that the plastic factory is producing at capacity and can sell all that it
produces to outside costumers. How should Lorne respond to Ongs request for a
lower transfer price?
Taking into account such event, a comparison between the two sales is
conducted.
Southern Division (outside the company)
Selling Price
Less: Transfer Price:
Materials
Labor
Variable Overhead

75
35
8
10

Gross Profit

Southern Division (within the company)

Selling Price
Less: Transfer Price:
Gross Profit

53
22

75
70
5

Based on the above computation, it could be concluded that if Southern Division will
supply within plastic pots within the firm ( Western Division) it will only earn lesser
as compared to its earning outside the entity.
------------------------------------------------------------------------------------------------------ Assume that the plastic factory is currently selling 16, 000 boxes. What are
the minimum and maximum transfer prices? Should Lorne consider the transfer
at P70 per box?
In the assumption stated above, the determination of the maximum and
minimum transfer prices is required thus resulting in the computations below as
follows:
Maximum Transfer Price = P75
Minimum Transfer Price
To determine the minimum price, knowing the number of remaining
units needed by Southern Division to complete the number of units to be
transferred is a pre-requisite. The solution are as follows:
(Production Capacity - Number of Boxes sold )
20, 000 - 16, 000 = 4,000

The required number of boxes to be transferred by Southern Division is

3,500 which is lower than the production capacity of Southern Division.
Thus there is no number of remaining units required for the said division to
fulfill the requirements.
To follow, the minimum transfer price is calculated by:
MinPrice =VC+ [Contribution Margin * remaining units needed]
total units needed
= 53 + 22 * (0)
3,500
= 53
Thus, it could be inferred from the above computation that the maximum transfer
price that the purchaser- Western division could tolerate is P75 and the minimum
transfer price that the seller-Southern division is willing to set as lowest price is P53.
These benchmarks are set forth by the corresponding division to know its limit before
it would incur a loss.
------------------------------------------------------------------------------------------------------Suppose that Greenworlds policy is that all transfer prices be set at full
cost plus 20%. Would the transfer take place? Why?
Considering the problem above, the result of an increase in cost is to tested
with regards to its impact to the divisions gross profit.
Selling Price
Less: Transfer Price:
Material
Labor
Variable Overhead
Fixed Cost
Total Cost
Mark-up
(20%)
Transfer Price
Gross Profit (loss)

75
35
8
10
10
63
12.6
75.6
(0.6)

In view of the above computation, it could be inferred that the impossibility

of the transfer to take place is probable. This for the reason that upon the increase
in cost by 20%, an unfavorable result, gross loss, would take place.

RECOMMENDATIONS
How should Lorne respond to Ongs request for a lower transfer price?
Based upon the result gathered from the findings above, Lorne Matthews
should decline to the offer requested by Jonathan Ong. This is because if Lorne
opt to approve upon by the request of Ong, it would only accumulate lesser
earnings as compared to what it could gain from supplying externally.
Should Lorne consider the transfer of P70 per box?
Upon the transfer of P70 per box between southern and western division, the
said transaction will held both division a recipient of benefit resulting from the
said event. This said benefit are profit and less cost of acquisition for southern
and western division respectively.
Taking this data as basis, then Lorne should consider the transfer of P70 per
box to the western division.
This same transaction will not only create an impact towards both
participating division but it could also give a good impact to GreenWorlds
consolidated financial statement.
Would the transfer take place? Why or Why not?
With regards to the result computed previously, the transfer should not take
place. This is because upon the increase of Southern Divisions cost by 20% ,
transfer price also increases. And, upon this increase, the new transfer price will
now exceed the selling price of the said division and subsequently resulting to a
loss therefrom.

MANAGEMENT REPORT AND RECOMMENDATION

for Electronics Division of Med-Products

Background
Nick dela Cruz was torn between conflicting emotions. On the one hand, things
were going so well. He had just completed six months as the assistant financial
manager in the Electronics Division of Med-Products, Inc. The pay was good, he
enjoyed his fellow workers, and he felt that he was part of a team that was making a
difference in the healthcare industry. On the other hand, his latest assignment was
causing some sleepless nights. Chris Mendoza, his boss, had asked him to refine the
figures on the divisions latest project- a portable imaging device code- named ZM.
The original estimates called for investments of P15.6 million and projected annual
income P1.87 million. Med-Products required an ROI of least of 15% for new project
approval. So far, ZMs rate of return was nowhere near that hurdle rate. Chris
encouraged him to show increased sales and decreased expenses in order to get the
projected income above P2.34 million. Nick asked for a meeting with Chris to voice
his concerns.
Nick: Chris, Ive gone over the figures for the new project and cant find any way to
get the income above P1.9 million. The salespeople have given me the most likely
revenue figures, and production feels that the expense figures are solid.
Chris: Nick. Those figures are just projections. Sales dont really know that revenue
will be. In fact, when I talked with our sales VP, she said that sales could range from
Php1.5million to Php2.5 million. Use the higher figure. Im sure this product will
justify our confidence in it.
Nick: I know the range of sales was that broad, but the sales VP felt the Php2.5
million estimates were pretty unlikely. She thought that during the first five years or
so that ZM sales would stay in the lower end of the range.
Chris: Again, the sales VP doesnt know for sure. Shes just estimating. Lets go with
the higher estimate. We really need this product to expand our line and to give our
division a chance to qualify for sales based bonuses. If ZM sells at all, our revenue will
go up, and we will all share in the bonus pool.
Nick: I do not know. I feel pretty bad signing off on ROI projections that I have so little
confidence in.
Chris: Look, Nick, just prepare the report. Ill back you up.

FINDINGS
ROI of Project ZM based on the initial estimate; ROI of the said project if
income rose to P2.34 million
ROI=

annual income
investment

If income rose to P2.34 million,

ROI=

annual income
investment

1.87 million
15.6 million

2.34 million
15.6 million

11.99%

15%

ZM Project will gain 11.99% of return on investment considering the annual

income of P1.87 million. If the project projected that the income would increase to
P2.84 million, it would incur 15% return on investment.

RECOMMENDATIONS

Upon accounting the said events, it could be inferred that Chris, Nicks
boss has a strong desire for its business lines expansion and its qualification for sales
based bonuses. And with his boss desire of such goals, it may be a probable source
of ethical dilemma resulting from Chris self-interest.
If Chris would continue to consider the usage of the manipulated data
without sufficient evidence, it would only result to misinterpretation of facts. This
facts may be able to help their business for current purposes, yet they should also take
into considerations the gradual effect of its manipulated data for the future business
years.
In this regard, Nick Dela Cruz should follow his stand regarding the
decision about increasing the sales estimates and or lowering the expense. He should
stand firm that there is no adequate evidence necessary to prove such changes and
that these alterations are merely influenced by his boss self-interest to fulfill the
requirements for the expansion of its line and qualification for sales based bonuses.