Rigs Auto Parts Transport Limited
Rigs Auto Parts Transport Limited is a long established Canadian company that assembles several different lines of heavy duty trucks, long haul trailers and accessories for these rigs. It has numerous divisions, including the 3S5BX Aggregating division and the Z99B6 Enhancing division. When Rigs Auto Parts Transport Limited commenced operations after the second world war, it was committed not only to assemble heavy duty rigs but also to manufacture all the most important component parts. Rigs Auto Parts Transport Limited supplied it's own aluminum, steel and windshield glass for the first 20 to 25 years.
Competition has always been severe since the start-up, when the American car companies wanted a foothold in the North American truck markets. More recently this competition has increased as the Japanese and Asians entered the North American market in the 1990's. Manufacturing the parts was necessary until reliable suppliers were recognized, first in some generic products such as tires, exhaust systems and batteries, then more recently for nearly all assembly parts. Rigs Auto Parts Transport Limited has gone from the start-up position as a manufacturer of heavy duty trucks, long haul trailers and accessories for these rigs to almost entirely an assembler.
Because they are unique to the company's truck and trailer models, Rigs Auto Parts Transport Limited still supplies relatively a small number of parts. Rigs Auto Parts Transport Limited's, Z99B6 Enhancing division still manufacturers platforms for the 3S5BX Aggregating division, which assembles all of the parts into heavy duty trucks and long haul trailers. The entire production of the Z99B6 Enhancing division is sold to the 3S5BX Aggregating division at a transfer price obtained by marking up variable costs by 85%.
However, the general manager of the 3S5BX Aggregating division is not content with this transfer price, he feels it is too high as it yields to Z99B6 Enhancing division a significant return on net fixed assets of more than that earned by the 3S5BX Aggregating division. He is asking for a transfer price that will allow Z99B6 Enhancing division to earn in the region of a more reasonable 25% return on net fixed assets, which is the minimum needed for that manager to qualify for his incentive compensation.
In the past there have been no external supplier sources for these unique platforms, at least not until recent developments, when Outsourcer International Ltd. made an offer to provide all the platforms to the 3S5BX Aggregating division. Outsourcer International Ltd. is a Canadian parts manufacturer with divisions all over the world. It has been a leader in using advanced flexible technology in manufacturing a wide and complete range of truck and automobile parts. Outsourcer International Ltd. has offered to provide the platforms to the 3S5BX Aggregating division at prices that average a 25% discount from the present transfer prices.
The terms and pricing of Outsourcer International Ltd.'s offer are seriously being considered by the 3S5BX Aggregating division. However, the general manager of the Z99B6 Enhancing division wants the offer rejected and he also is requesting a higher transfer price as Outsourcer International Ltd.'s offer does not reflect the true costs of manufacturing the platforms. Once the initial bid is accepted, Outsourcer International Ltd. will eventually increase its prices in future bids and there are also quality control issues that are of a concern due to their considerable low price bid.
The board of directors of Aangamm World International Limited has requested that the Chief Executive Officer address the concerns with each of the two general managers with a proposal for resolution of the conflict. The Chief Executive Officer of Rigs Auto Parts Transport Limited in turn has called upon you, as the Chief Managerial Officer of Aangamm World International Limited, to review the managerial accounting aspects of the situation before he sits down with the managers to resolve the dispute.
You review the current budgets for both divisions and are able to conclude that both divisions are in line to meet their budget expectations and also do not anticipate any non controllable market influences to affect their performances. You also become aware that if the outsourcing of the platforms were accepted, only $65 million of the Z99B6 Enhancing division's fixed costs would be avoidable.
See Schedule Z on the next page for the most recent financial data.
Required:
As the Chief Managerial Officer of Aangamm World International Limited undertake your assigned task regarding the divisional issues at Rigs Auto Parts Transport Limited.