TAYLOR CHEMICAL COMPANY do BRAZIL, Ltda.: CASE ANALYSIS
In the fall of 1997, the Board of Taylor Chemical Company, Inc. (headquartered in the United States) is concerned about the performance of its Brazilian subsidiary, Taylor Chemical Company do Brazil. With the entry of Brazil into a South American free trade association (Mercosur), the Brazilian subsidiary must improve its productivity to meet the increased competition. The Board has established a goal of a 14 percent return on assets for the Brazilian subsidiary to assure that the subsidiary's performance meets the parent company's expectations. This goal, however, indicates that either the Board of Taylor Chemical Company or the writers of this case do not know how to read financial statements.
The case writers indicate that the overall company earnings in fiscal 1996 were US$79 million on sales of US$538.2 million. This performance equated to a 14.7 percent return on sales, and equated to a 39.5 percent return on total company assets of $200.1 million (refer to Case Exhibit 2). In fiscal 1996, the operating profit of the company was $111.9 million, a 55.9 percent return on total assets at the operating performance level.
As the focus of this case is on improving the operating performance at the Brazilian subsidiary, the focus must be on operating income/loss at the subsidiary. In fiscal 1996, the Brazilian subsidiary, according to the case writers, earned an operating profit of US$1.9 million on sales of $43 million, which equated to an operating return on sales of 4.4 percent. With respect to operating return on total assets, however, the subsidiary's performance at the operating performance level of a 19.8 percent return on total assets of US$9.6 million (refer to Case Exhibit 3). Thus, at the operating level, the subsidiary was already performing higher than the performance goal established by the Board.
According to Case Exhibit 4, the company's Brazilian...