Essay on Hollandsworth Proposal To Build a Factory in the UK To Produce AR42 for Axeon N.V
Number of words: 2614
Teaching management control courses and systems virtually are constantly enabled by using heavy instruction methods. Instructors who have the habit of lecturing by describing management controls in a relatively formal manner find the helpful model in using illustrative lecture points or using parameters that are crucial models and parameters. In course organizations, there are no single definite fits that have template approaches. Generally, management controls are complex and multi-dimensional, and the courses of management can be arranged and organized in several ways.
The memo designed for Mr. van Leuven and the management will focus on understanding the interests that will accrue from Axeon constructing a new factory in the United Kingdom. Furthermore, the memo will try to dig into the impacts that will accrue from Axeon failing to construct the new factory and instead make a shipment of AR-42 from the Netherlands, the transfer fee would cost and what should be done by Mr. van Leuven.
Background Information on Axeon N.V
Axeon N.V is a company that manufactures chemicals. It has its base in the Netherlands, where it started with only two divisions: the sales and manufacturing divisions. However, it has since expanded to Sweden, the United Kingdom and also to Italy. The company operates in a decentralized manner, and its foreign subsidiaries make autonomous operations in the products they offer across their territories.
For Axeon to increase its production output, it was faced with two options. One was to venture into the market in the United Kingdom through building a production firm for AR-42, while the other option was to maintain the manufacturing of the product in the Dutch plant and then make shipments to the United Kingdom.
After relying on several assumptions of making evaluations, some assumptions of the proposal seems not appropriate, which includes the discount rates of 8% in the computation of the net present value of borrowing funds from the United Kingdom, and the proposal should rely on the 12% that is available in the calculation of the rate of return. The variable costs are also high, making the proposal unrealistic, and the assumed values of asset recovery are also unusual. Therefore, a compensation system should be changed for the division managers to make goals beneficial to the company. The option of manufacturing the product in its main production plant in the Netherlands seems to be the most viable solution since it comes with low costs of making shipment of the product compared to building a new factory in the United Kingdom.
The Most Important Issue in Axeon
In 1998 around October, Anton Van Leuven, the managing director in Axeon N.V, a large chemical company in the Dutch country, had a relatively complex decision. The managing directors of its subsidiary in Britain, Ian Wallingford of Hollingsworth Ltd, and one Jeremy Noble, the board member of the directors, were equally frustrated. It was because a proposal aimed at investing in the company that had previously been presented by van Leuven to the board long ago was yet to be approved, leave alone being implemented. Additionally, the committee member had threatened to resign from the position due to pressure and frustration. However, Mr. Van Leuven receives advice from various managers to ensure that he rejects Hollandsworth’s proposal.
Moreover, the management style at Axeon was top-level management, and managers at the company emphasized high degrees of decentralization where the managers of the subsidiary units had autonomy that was considered in deciding what would be sold across their territories. For instance, all products produced or manufactured in its factory in the Netherlands would quote prices to its subsidiaries, which would be the same across all other subsidiaries and agents in the other countries where it had established its bases (Dijken, 2017). If the subsidiaries were of a different opinion, they would bargain the price. If they objected to the final pricing formula, they would not sell the product in the market.
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Is The Construction Of The New Factory In The UK In The Best Interest Of Axeon N.V.?
Constructing a new factory in the United Kingdom is not in the best interests of Axeon N.V since the production costs in the United Kingdom surpasses the shipment costs from the Netherlands. All the calculations regarding the manufacturing of the product in its existing plant in the Dutch territory prove as the alternative that is better than manufacturing in the UK because all the economies of scale are considerably achieved, particularly the variable costs that are reduced per unit.
If The Decision Is Made Not To Build The Plant And AR-42 Is Shipped From The Netherlands To The UK, What Transfer Price Would You Recommend?
Three strategies can be used depending on the financial situation: quasi market-based transfer price, the negotiated transfer price, and total cost plus mark-up transfer price.
Quasi Market-Based Transfer Price
Under this strategy, there are simple chains of supply where the manufactured goods pass from one division to the subsequent division, which works well for those companies that operate without many subsidiaries. However, accountants pretend that goods were either lost or created in the air in more prominent companies with many subsidiaries and other smaller companies. Most companies use the transfer pricing model, which is the best method of charging different divisions and various goods (Friis, 2020). There is a belief among people in business that the transfer pricing model that is market-based and which prices goods at their base values in the open market are one of the best pricing methods.
Negotiated Transfer Price
Under the negotiated price of making a transfer, the transfer price is completed, determined, and then agreed upon by the purchasing divisions or segments and the seller. The negotiated prices are essential in several ways as they have immense advantages. One of its advantages is that the approach preserves most of the autonomies of different divisions and has a constant and consistent spirit of centralization. Secondly, the approach offers managers of the divisions the chance to have better information regarding potential costs and the costs that may accrue from the transfer of everyday goods and services from the company at the expense of others.
Where the strategy of using negotiated methods of price transfer is used regularly, the managers of the involved companies and their subsidiaries involved in the transfer across the company’s settings periodically meet to discuss the terms and the conditions of such transfers. Therefore, they must reach an agreement on the transfer price of the goods and services of the company (Arnold et al., 2019). The selling division coordinates on the transfer if such profits of the transfer result in profits gained from the transfer. At the same time, the purchasing division agrees to such a transfer when the profits gained from the transfer also increase significantly from the effects of making the transfer.
Total Cost plus Mark-Up Transfer Price
The strategy of full cost plus the mark-up transfer price sums up as one of those strategies used in the primary methods of making transfer pricing and looks at comparable transactions and the profits gained in a similar organization that is a third party. It ensures that companies make fair allocations of their profits that are accumulated internationally in the subsidiaries. The method is regarded as a traditional method of making transactions, which means that it has its basis on mark-ups of third parties’ observed transactions (Kamdar, 2018). However, the transaction-based method is a less direct method of making transactions than other transaction methods. Still, it has various similarities concerning the methods of profit-based.
The negotiated transfer price method is a neutral method of making transfers where both participants can determine the prices and even reject the proposed expenditures. It is recommendable to use the technique. It helps both players fix a pricing formula acceptable to both parties and aims to recoup profits to both parties without making losses from the making of the transfers. Moreover, it is flexible to the parties since none of them is forced to enter into the transfer price’s agreement without a will, meaning that every party is satisfied by the transfer price set out for the transaction to commence. Therefore, the transfer price should be between £ 2560/ton and £ 3346 per ton. In choosing this pricing formula, you must take account of the company’s current position. The agreed transfer price is unacceptable, although it is both possible to use quasi market-based and maximum cost plus mark-up transfer price. Therefore, my advice or recommendation is to select the transfer price of the negotiated transfer price for the company of Hollandsworth comparatively and apply more mark-up than the Axeon Dutch, which uses the total cost plus mark-up method.
What Should Have Been Done By Mr. Van Leuven?
Considering that AR-42 has to be supplied directly from the Netherlands, which comes with negotiated prices of transfer, Mr. Van Leuven should have reviewed the strategies of approach to developing the new factory in terms of having autonomy. He should have encouraged the subsidiaries to pass the proposals of new projects and develop new products at their local bases instead of relying on shipments but centralizing the final proposal’s approval.
Additionally, he should have produced some of the personnel systems of control to control and avoid the demotivation of subsidiaries if the proposal was headed for rejection. Moreover, the phase of pre-study of the final project ought to have been approved by the full management of Axeon and give the subsidiaries the independence to make some of their plans towards the project. However, he should also have designed a rewarding system for the management executives of the subsidiaries concerning the market shares of responsibility since the final products are designed and produced at the main factory of Axeon.
Mr. van Leuven should have provided the SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). It would have acted as an easy way for him to detect the issues and make definitions of the plans that aim to eliminate and reduce some of the problems in the company. The analysis could also produce some of the required controls. In doing so, his proposal would have been largely accepted and adopted by the management of Hollandsworth and the board’s managing directors of the company, even though some information was missing in the proposal.
It means that the role of Mr. Van Leuven as the managing director and in his proposal, two things in his proposal should have been considered seriously, with the first one figuring out how to achieve the best goal of getting a cost-effective method time efficient. The next option would have been formulating options on leading and building morale and autonomy of managing subsidiaries in a way that is deemed to be correct. Additionally, Hollandsworth should have decided to purchase AR-42 products directly from the Netherlands instead of investing in building a plant in the United Kingdom. In the sessions, Mr. van Leuven should not have remained quiet, although he did not make any estimates before the board’s conference, where he stayed without back-up. He was wanted to be able to justify and help his proposal.
The management of Axeon was faced with a rift between the management at the headquarters and at the levels of its subsidiaries, where communication could not flow accordingly. Mangers at the subsidiary levels held different opinions from those from the higher offices since the pricing method was a factor in determining the best price for the company’s products. Moreover, there ought to have been independence in product pricing across the various subsidiaries since the economies of scale range from one region to another and from one country to another.
In matters where managers make investment proposals, there is the need to evaluate their proposals for the benefits of the projects of investment and implement the most viable solutions to the proposed issues instead of rejecting the whole proposal in general. It means that the proposal that Mr. van Leuven presented ought to have been tabled and evaluated for gainful elements within it and implement what is viable in the proposal in addition to amending the parts that were deemed not to be desirable. The proposal could at some point prove to be of help after the lapse of seven years which is a long-term solution. Finally, members’ proposals to companies should be evaluated in detail before deciding their contents.
The construction of Axeon’s new factory is not of the best industry because Ian’s proposal has a lower NPV. After all, manufacturing in the Netherlands and making the shipments to the United Kingdom affect economies’ scales. Also, it increases the synergies considering that the variable costs will drop from the current £1,900 to approximately 1,860, and the overhead costs will come to £360, which will increase the market penetration. It’s not Axeon’s biggest priority because making the production in the Netherlands is safer since it saves fixed costs (Minoli & Occhiogrosso, 2018). For instance, in the Netherlands (1000 tons output would save £ 240/ton) compared to the expenses incurred by not creating a new plant in the United Kingdom.
Reducing the total cost of production (£ 60 X 400 tons = £ 40 X 600 tons) will compensate for the rise in variable costs due to reduced shipping costs to the United Kingdom. Additionally, constructing the new plant in the United Kingdom exceeds shipping the product from the Netherlands to the United Kingdom in the short term, although it has long-term benefits. If a better AR-42 quality is generated only in the United Kingdom, it could create conflicts in the future due to rivalry and loss of market shares. The evaluation by Ian fitted since it seems realistic in comparing the variable costs and the sales where the valuation of the final plant at its final phase after the expiry of seven years seems to be lower than the initial years. The technology that Axeon needs to adopt as a new venture and the technology is neither considered. The plant will have to operate to its total capacity. There will be no provision for capacity fluctuations room thinking that the shipments of AR-42 coming from the Netherlands may come with costs of £ 2,060 in every ton and the NPV of £1,326,678,000 is higher than the proposal Ian of £ 916 000,000.
Arnold, M. C., Gillenkirch, R. M., & Hannan, R. L. (2019). The effect of environmental risk on the efficiency of negotiated transfer prices. Contemporary accounting research, 36(2), 1122-1145.
Dijken, R. V. (2017). Downsizing and M&A activity: closing the gaps.
Friis, I. (2020). Preservation of incentives inside the firm: A case study of a quasi-market for cost-based transfer pricing. Journal of Management Accounting Research, 32(2), 137-157.
Kamdar, M. (2018). Acceptable methods for determining an arm’s length price for transfer pricing. Tax Professional, 2018(33), 18-27.
Minoli, D., & Occhiogrosso, B. (2018). The Emerging “Energy Internet of Things”. Internet of Things A to Z: Technologies and Applications, 385.