FINAL ASSESSMENT QUESTIONSKAPLAN PUBLISHING 3
THIS ONE QUESTION IS COMPULSORY AND MUST BE ATTEMPTED
1 SYNFIB AND THETFIB
C is a company which is engaged in synthetic fibre production. It is situated in Homecountry where it operates two production plants. C pipes raw material from an oilrefinery (which it does not own) to its own production plant where it manufactures asingle product which is a special grade of polymer. The polymer is then transferred toa second production site which produces two products, ‘Synfib’ and ‘Thetfib’. As thepolymer is of a special grade and manufactured specifically for the production of Synfib and Thetfib, there is no intermediate market for it. The transfer price for thepolymer has been set at $40 per litre.
Mission and objectives
C's Chairman has declared that the firm's mission is to ‘provide its customers with thehighest quality product at a reasonable price’. The organisational objectives are tosatisfy the demands of the shareholders, reduce pollution to a minimum, maintainsecure employment and to sell a product of high quality which satisfies customerrequirements. The objectives also make reference to maximisation of shareholderwealth while at the same time keeping the shareholders' exposure to financial risk toa minimum. Approximately 75% of the shares are held by large financial institutions.The remainder are held by individual investors including employees and the Directors.
The final products
While Synfib and Thetfib are both produced at the second production site in Home,they are produced in different processes. There is strong demand for both of thesespecialist products worldwide and C is the only producer. However, substituteproducts are available and may be used in place of them. The following scheduleshows the monthly demand for each product at various selling prices.
Litres (millions) $ per litre Litres (millions) $ per litre75 200 200 70100 175 400 60125 150 600 50The Divisional Manager (M) of the second production site has autonomy to choose thelevel of output, and always selects that level of output which maximises divisionalcontribution.Output of Synfib is produced in batches of 25 million litres. The minimum monthlyquantity produced is 75 million litres. Thetfib is produced in batches of 200 millionlitres with the minimum monthly quantity being 200 million litres. Sales of eachproduct are made in these batch quantities and it can be assumed that they areindivisible. The maximum monthly demand is 125 million litres for Synfib and600 million litres for Thetfib, and these are the maximum quantities of each productthat can be produced each month.As a result of its production processes, Thetfib emits waste products which pollute theatmosphere. The government of Home has introduced strict regulations in recentyears to control waste emissions and C estimates that the firm incurs a fixed monthlycost of $2,000 million in order to comply with these regulations.