Western Chemical

Corporation
Division Performance
Measurement
Kelompok 5
Bayu Ari Bowo
(1506773791)
Iga Cindy Pratiwi
(1506774043)
Purnellatika Azani
(1506701123)
Yuha Nadhirah Qintharah
(1506701376)

Outline
Corporate Profile
Three examples of WCCs Plants
Q1 : Problems in measuring division
performance

Q2 : Alternative methods for measuring

division performance

Q3 : Economic Value Added (EVA)

Strengths
Weaknesses
Q4 : Measuring Performance of WCCs
Divisions

Q5 : Explanation of WCCs investment

in Czech Republic, Poland, and

Corporate Profile
Est. 1920
1995 Fortune 300 chemical company
Products and services: Chemicals and
chemical programs for water and waste
treatment

Multinational Corporation (MNC) :

4.900 employees
35 Plants in 19 Countries

WCC as Multinational Firm

WCC

Wholly
Owned

Joint
Venture
with Local
Affiliates

Three examples of WCCs Plants

Plant in Czech Republic
Joint Venture
Total investment (Total Assets) of
Plant : $35 - $40 million
WCCs investment : $5 million
(controlling interest)
Most of funding are from Debt (60%80%) interest
Fees under technical agreement are
paid by Joint Venture to WCC as a
percentage of revenue as an

Three examples of WCCs Plants (contd)

Plant in Poland
Wholly owned (100% owned by WCC)
Total investment (Total Assets) of
Plant : $40 - $45 million (include
working capital)
No External Debt, No minority
interest, No Technical Fee
All transfer price from other WCCs
Plants are reasonable

Three examples of WCCs Plants

(contd)

Plant in Malaysia
Wholly owned (100% owned by WCC)
Total investment (Total Assets) of Plant : $35
million

No External Debt, No minority interest, No

Technical Fee

All transfer price from other WCCs Plants are

reasonable

Add capacity in Pacific Region and serving the

global market (swing plant)

Dimension of Malaysia Plant

Produce for its
Region
RoM
Produce for other
region
Malaysia Plant
Sale to Pacific
region from its
product
RoS

Sale to Pacific
region from
other Plants
Product

(the 3rd Quarter Reported Income

in 1995)
(in thousand $)
Revenues
Cost of
sales

Selling, technical expenses, and

administrative expenses
Other income/Other charges
Income before interest and taxes

Czech (joint
Venture)

Poland (Wholly
owned)

9/95 YEAR-TODATE

9/95 YEAR-TODATE

Malaysia (Wholly owned)

Region of
Region of Sale
Manufacture
9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE

11.510

32.536

12.020

36.052

(9.541)

(28.458)

(12.392)

(26.648)

(891)

(2.529)

(3.775)

(4.845)

(209)
869

(121)
1.428

(685)
(4.832)

(285)
4.274

Interest

(1.120)

Fees

(867)

(60)

34

(1.178)

1.462

Foreign exchange

Income
(loss)
Minority

(4.832)

4.274

Q1 : Problems in measuring
division performance
Different in Ownership structure
differences in reported income (Interest and
Technical Fees Expenses)

The

Plant with 2 dimension function (Region of

Manufacture and Region of Sales) Two
reported income

Lack of good management reporting system

Other external factor : currency fluctuation,
income taxes, local economic condition, legal,
political forces, and so on.

for measuring division

performance
Difference in
ownership
structure

Difference in
reported
income

EBIT as
measureme
nt base

External Factors
(Currency Fluctuation,
Taxes, and so on)

Difference
impact in
reported
income among
Division

EBIT as
measurement
base

Two reported
income

Total
incremental
analysis
system

Plant with 2
dimensional function

Alternative
Method :
1. Margin
(profitability
measurement)
2. Aset Turnover
(The
effectiveness of
assets usage)
3. Division ROI
4. Residual
Income
no
information
about the revenue
of Region sales
from Malaysia
Plants Product
Region of
Manufacture only ,
instead of use
total incremental

Q3 : Economic Value Added (EVA)

EVA After-tax operating income and Acctual cost of
capital difficult to measure performance of WCCs
Divisions with discussed condition

Strengths
Help managers to recognize how they create value the
division create wealth for corporation : Positive EVA; vv.

Weaknesses
Using of after-tax operating income misleading in
financial performance measurement of
firms divisions
Accrual distortions
Historical financial data

multinational

Q4 : Measuring Performance of WCCs Divisions

No single ratio or method that can provide the
complete picture on how the division is performing

Methods :
1.
2.
3.
4.

Margin Profitability
Aset Turnover The effectiveness of assets usage
ROI
Residual Income

Q4 : Measuring Performance of WCCs

Divisions (contd)
(in thousand $)

Revenues

Czech (joint
venture)

Poland
(wholly
owned)

9/95 YEAR-TO-DATE

9/95 YEAR-TO-DATE

Malaysia (wholly owned)

Region of
Manufacture

Region of
Sale

9/95 YEAR-TO-DATE

9/95 YEAR-TO-DATE

$ 11,510

$ 32,536

$ 12,020

$ 36,052

Income before interest &

taxes

$ 869

$ 1,428

$ (4,832)

$ 4,274

Avarage operating assets

$ 37,500

$ 42,500

$ 5,000

100%

Czech

Poland

Malaysia

Margin

7,55%

4,39%

-40,20%

0,31

0,77

0,34

2,32%

3,36%

-13,81%

WCCs investment

Assets Turnover
ROI

$ 35,000
100%

$(2.506.000 $(2.397.000 $(7.982.00

Q5 : Explanation of WCCs
investment in Czech Republic,
Poland, and Malaysia

Margin
Assets Turnover
ROI
Residual Income

Czech
7,55%
0,31
2,32%

Poland
4,39%
0,77
3,36%

Malaysia
-40,20%
0,34
-13,81%

$(7.982.000
$(2.506.000) $(2.397.000)
)

Margin highest profitability : Czech division

Asets TO most effective in asset usage : Poland division
ROI best return on investment : Poland Division
RI all of three divisions had operating income which
couldnt
recover WCCs required return on investment
(assume : corporate required rate of return = 12% same with
capital charge)

Suggestion
WCC should use total incremental
revenues and costs for evaluating
division performance with 2 or more
dimensional functions

WCC should not include factors over

which managers exercise no control

THANK
YOU