Polysar Ltd. Harvard Case Solution & Analysis

POLYSAR LIMITED

Background: 

The largest chemical company of Canada, ‘Polysar’Limited was one of the world’s largest petrochemicals and otherfuel products manufacturer along with synthetic rubber and latex. ‘Polysar’Limited was established to manufacture synthetic rubber during the world war II as an alternate to natural rubber as the distribution of natural rubber is disturbed during world war II.At that time natural rubber was inits normal position by the end of world war and Polysar Limited facessome serious issues to its business after this world war. Canadian Government privatized all of the natural rubber manufacturing plants, but Polysar Limited was given under the control of Canada development corporation (CDC). The Polysar Limited went into the initial public offering and this decision was made by the Canadian Development Corporation (CDC) in terms of selling most of its ownership to public.

Polysaroperates in the chemical industry. Polysar was not only operating in chemical production, but also having its operation in rubber manufacturing and other diversified products including latex and other special plastic products.

Problems and Issues:

Polysar Limited operates its business in two different divisions; one is North and South America (NASA) and other is the rest of the world (EROW).Pierre Choquettereview the financial statement of the Polysar Limited and acknowledged that north and south American (NASA) division revenue was up to the projected sales of the division, expenses related to that division is minimized, butthe only problem is the fixed which was higher than it was estimated, which cause in lowering the total profits of this division because North and South American (NASA) division plants are not fully utilized that’s why more fixed cost is incurring on less sales volume which lowering its profits.

The other problem is that its irregular distributions of salesfrom its both divisions that is NASA and EROW, the problem is that NASA some of the time distribute its product in the EROW region and sometime EROW division distribute in the NASA region, which results in higher shipping cost for both of the divisions.

Higher costs at North & South American (NASA) division would lower the profits of European& rest of the world (EROW) division as NASA plant transfers its products to EROW plant at higher cost which affect the profitability of the EROW plant consequently. As the EROW plant sales the product at higher prices which affects the sale of EROW division.

Analysis:

This problem of Polysar Limited North & South American (NASA) division that it is not running at its full utilization which results a volume variance of $22,312, as calculated in Appendix, volume variance arises due to lower total number of units sold than total expected because more fixed cost and depreciation on lesser output, which lowering the profits of the Polysar Limited, as the plant is running at the level of 65,000, it is underutilized by 30,000 units because the maximum capacity level of the plant is 95,000 units. The depreciation of these underutilized30,000 units which is approx. $76 per unit is charged on the remaining 65,000 unitlevel, which triggers the per unit depreciation from $165 to $240 per unit due to this underutilization of the plant,in the same way per unit fixed cost excluding the depreciation of $300 would also increases by $138 per unit at the level of $438 per unit due to underutilization of plants capacity.

Polysar Limited’s both divisions that is North &a South American (NASA) and European and rest of the world (EROW) divisions are not making their distributions from their relevant divisions. Sometimes NASA shipment is  in the EROW region and sometime EROW shipment is in the region of NASA,the shipment would be made through relevant divisions so that no extra cost would bear by the Polysar Limited on the shipment so that the profitability of each department would be maximized.

The transfer price of North & a South American (NASA) division would be minimized as much as possible to the European & rest of the World (EROW) division, less transfer cost would improve the efficiency of the EROW plant that they have more margins to earn profits as the product cost would be less due to less transfer cost.

Recommendations

Polysar Limited should be more focused on North & South American (NASA) because  this plant is underutilized, this underutilizationcan be reduced by seeking the more marketplaces to sell the product over different markets to expandits product demand so that their North & South American (NASA) utilized at its full capacity level, which increases the profitability of the NASA division because the fixed cost and depreciation of this plant would be charged on more production volume to maximize the profits. Alternate cost of action is that Polysar Limited may outsource its underutilized plant if its plant have market value which.................

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Canada's largest chemical company manufactures and markets a butyl rubber in two divisions, each considered as a profit center. The new plant in North American Division is working at full capacity due to a significant deviation of volume and operating losses. European unit at full capacity and useful. Actions of the European department affects capacity utilization department of North America. Includes financial statements of departments and interviews with the vice-presidents of each division. "Hide
by Robert L. Simons Source: Harvard Business School 13 pages. Publication Date: Feb 05, 1987. Prod. #: 187098-PDF-ENG

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