Sarnia Case Study Solution

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Register to read the introduction… Having a negative figure means the production is below demonstrated capacity.
• The best way to eliminate the variance is to produce close to 85,000 tonnes. However, from the Statistics and Analysis, the management only expected to produce around 55,000 tonnes and transfer 19,500 tonnes to EROW. This was way less than the standard, not to mention the actual production was even lower. Accordingly this created a material difference of $5.25 million on volume variance.

DETAILED ANALYSIS: For the purpose of a more detailed, step-wise analysis, let’s examine the different cost components of the production process at the two plants (using exhibits 1, 2 and 7) and compare them to understand exactly where the NASA plant needs to concentrate in order to perk up its bottom line. According to the case, butyl rubbers were accounted for using standard rates for variable and fixed
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From this we see that the fixed cost incurred by the EROW plant ($620) is much lower than that of the Sarnia plant ($700). This could be due to the fact that the EROW plant has been functioning longer than the Sarnia plan. Thus, we can say that within a few years of normal performance the Sarnia plant would also be able to lower its fixed costs.

The budgeted and actual volume variances given in Ex 2 have been calculated as follows:
Plants’ demonstrated capacity= 63,750 tonnes.
Budget volume variance = (63,750- 55,000)* $700 = $6,125
Actual volume variance = (63,750 ' 47,500)* $700 = $11,375.

If we use budgeted production instead then:-
Standard fixed cost per ton= $ 44,625 / 55,000 = $ 811 per ton
Volume variance= $811 * 55,000 = $ 44625 which is the same as budget fixed cost to production Actual volume variance would be = (55,000 ' 47,500) * $ 811 = $
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It is easy to understand that faulty products hurt the reputation and cause customer dissatisfaction. Machine downtime, is the stroke to manufacturers. EROW has a bigger risk in this case as it has a single plant running at full capacity. Were it to take a toll, half of Rubber’s production will be paralyzed and they have to eat up the fixed cost.
Though employer moral hasn’t been discussed in the case, the management should be cautious about the conflicts between employees and employers. In NASA, employees don’t seem to share the worry of being laid off as the number of staff is relatively stable for its computerized production line. This may create certain loyalty among employees. However, the company’s compensation combined a below-industry salary with a bonus tied to financial performance. Under the unfavorable financial situation, NASA’s management was certainly dealing with employees at a certain level of risk.

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