Caribbean Brewers: Transfer Pricing, Ethics and Governance
Case Summary Gera International is a well established international brand of beer that is ranked amongst the top three brands of beer in the world. With transportation prices rising, Gera International decided to purchase a plant in Antigua in 2005 and they renamed the subsidiary, Caribbean Brewers, Inc. (CBI). In 2008, the production facilities of CBI were expanded and their productive capacity doubled. Furthermore, we are then introduced to Jason Joseph a production manager who is unhappy and distressed because along with the production doubling, he lost ownership in the company, bonuses, and annual dividends. JJ comes to us (the financial advisor to the CFO) and informs us …show more content…

JJ had no control of capacity doubling nor was he involved in an increased depreciation expense, so we believe his bonus should not be based off of it. Total production costs increased $20,344,920; alone the bottle variable cost and the depreciation fixed cost total increase was $9,368,000, resulting in nearly 50% of total production costs increase. If we had removed the increase of the two costs, the 2009 total production costs would have been $37,842,320 and this would have only been a 42.96% of sales. JJ would have still been a happy fellow because he would have met his threshold. From another perspective, fixed costs in general are typically not something that a production manager can control; however, CBI still includes these costs when considering the production manager’s bonuses. The production manager also cannot control how many cases are sold and how much the beer is sold for so by comparing the costs to sales would cause JJ to lose bonuses if sales were low. If we use the chart based off of gross margin above and only include variable costs, this performance measurement system would be a better depiction of how JJ and his production team is performing; however, by basing things off of items they cannot control this creates an environment where no one is motivated because their sole performance is not evaluated. Next, we will evaluate the performance measurement system for production