Background: Polysar Limited is the Canada largest chemical company Primary products of rubber products are sold to manufactures of automobile tires. The organization is structured into three groups: petrochemicals, rubber and diversified products. Rubber group accounts for 46% of Polysar sales and has two divisions, which are NASA (North and South America) and EROW (Europe and rest of World). NASA manufactured Butyl known as Sarnia 2 plant. EROW manufactured Antwerp plant, which makes both butyl and halobutyl. Sarnia 2, manufactured by NASA, is a relatively new facility, dedicated entirely to butyl production. Since regular butyl demands over the plant’s remaining capacity, so EROW “buys” butyl from NASA.

Problem: The problem is how Pierre Choquette, as Vice-President of the NASA Rubber Division, explain to board why the report shows the results that their division did not good as expected and they run business on return on net assets which looks ridiculous for NASA, but actually the results to factors are outside their control.

Analysis: NASA’s budgeted rate for allocating manufacturing overhead costs to Butyl is $700 per tonne ($44,625,000/ 85,000 *9/12). Because fixed costs were allocated to production based on a plant’s “demonstrated capacity” using the following formula (standard fixed cost per ton = estimated annual total fixed cost ÷ annual demonstrated plant capacity). The components of transferring to FG inventory, to EROW are already closed out into “Cost Adjustments”, “ Spending Variance,” and “ Volume Variance” in Exhibit 2. The Volume Variance (5250) is calculated by the difference between capacity and production multiply by $700 per tonne. Actual production is lower than budgeted production so the actual volume fixed costs will be higher than budgeted volume fixed costs. This leaves with a lot of unabsorbed fixed costs. If NASA produces for