1) Prepare a report in which you assess the current profitability of the Soap Division.
In order to analyze the profitability of the soap division, we have to first calculate the current profit margins of each line. From our analysis we can see that the bar and perfume soap products are not profitable with their current volume-price relationship. We performed the break-even analysis for both the bar and perfume soap products with the objective of determining the minimum number of units that should be sold for each of the products to be profitable. The results indicate (see appendix 1) that 100,000 additional units of bar soap at $1.4 per unit are required to reach the break-even point. Using the current price of perfume soap the quantity needed to reach the break-even surpasses the capacity of the line by 204,000 units (more than double!).
With this analysis we can conclude that the company should revise bar and perfume volumes and prices because the current ones are not generating any profit. In fact, these lines are being subsidized entirely by the profit of the liquid soap. We will include an entire section with recommendations for improving profitability at the end of the report.
2) Include a recommendation with respect to the production of deodorant soap for Europe.
First at all, we have to emit an opinion about the method that was used to suggest the transfer price of the deodorant soap. According to the article "there are three main methods for determining transfer prices: Negotiated transfer prices, Market-based prices, Cost-based transfer price". In this case the policy of transfer pricing of Renoir is cost-based transfer price (full cost by 1.25) but its partner Company is suggesting a market-based p ...