Case Study: Chemical Bank
* Sunil Rabertson Chikkala
1) Describe the due bill controversy and how do you resolve it?
Below Four divisions of Chemical Bank involved in Due bill controversy:
* Treasury Group
* Metropolitan Division
* Trust and Investment Division
* Finance Division
Treasury Group was responsible for investing Due Bill funds in greater interest generating markets and for trading in secondary market. Metro Division sells Due bills to customer; Trust & Investment division involved in setting up Due bills accounts and in providing Data processing services. Finance division was responsible for Cost and profit allocation between ...view middle of the document...
Due to this there was conflict of interest between these divisions. For Treasury division, Due Bills was huge profit generating product, managers/traders in that division were keen on increasing Due Bill sales volume and there by profits. Whereas for Metro division it was yet another product under many business/individual deposits they are dealing with. Considering costs associated and amount of work involved with Due Bill, it was not critical to meet their goals.
To resolve this problem, Firstly I will analyze gaps in system in terms of cost allocation, revenue sharing , transfer price and create a strategy to address gaps, motivate teams across divisions to work towards company objectives.
2) What is the transfer price from metro branches to the treasury and vice-versa?
Transfer pricing necessarily results from the exchanges of goods and services among the decentralized units of company.
a) Transfer prices are the monetary values assigned to these exchanges are transfers.
b) Fundamentally, all cost allocation is a form of transfer pricing.
* Minimum Transfer price = Outlay cost + opportunity cost to the company as a whole
As per the exhibit 4:
Assuming opportunity cost is zero as exchange of services was between the divisions of same company.
a) As per exhibit -4, there was no cost allocation between Treasury and Metro divisions, hence transfer price will be:
Treasury to Metro was $0
Metro to treasury was $0
b) Considering Treasury division is sole beneficiary of Due Bills and Monetary division is supporting division, every Due bill transaction was costing $26.50 to Metro division, transfer price will be:
Treasury to Metro was $0
Metro to Treasury was ($26.50)
c) Considering Treasury division is sole beneficiary of Due Bills and Monetary division is supporting division and every Due bill transaction was costing $26.50 to Metro division, Ideally transfer price should be:
Treasury to Metro => $0
Metro to Treasury => $26.50
3) If you are the COE or consultant to the CEO how will you solve the internal friction to make you more competitive?
My approach to solve the problem is mentioned steps below:
Step 1: Analyze the facts of current system:
a) Profit and Loss statement of T-Bill:
* Treasury division is sole beneficiary of T-Bill and Metro division & T&I divisions are supporting divisions. T&I cost completely allocated to Metro division.
* Complete Fee revenue is going to Treasury division, though metro division is selling T-Bills to majority of customers.
* Increase in volume of T-Bills sales would increase profitability of Treasury division where as it will increase loss to Metro division.
b) Performance appraisal and Incentives:
* Treasury group’s incentive system was closely tied to profit performance. Bonus opportunity of Trader could be as high as 200% - 300% of Salary.