Caribbean Brewers: Transfer Pricing, Ethics and Governance
Douglas Kalesnikoff University of Saskatchewan Suresh Kalagnanam University of Saskatchewan
It is April 2011 and you have used your newly acquired business degree to secure a management job as advisor to the chief financial officer with Caribbean Brewers Inc., located in Antigua in the Caribbean Sea. Caribbean Brewers Inc. is a 75%-owned subsidiary of Gera International, a conglomerate in the business of brewing and distributing beer. It is barely a week since you started your job and you already have major projects to deal with.
Gera beer has been a well-established international brand of beer for over half a century,
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JJ has been production manager for decades and has been heralded as a master brewer, having won multiple awards for Tigua beer in the late 1990s and early 2000s. It is clear during the meeting that JJ is unhappy and distressed. He explains that prior to Gera International’s involvement in the brewery, things were better; JJ previously had a 25% ownership in Caribbean Brewers, which is now reduced to 8%. He had always received a salary of about $100,000 as the production manager, but had also benefited by a bonus and an annual dividend. Since Gera International became the majority shareholder, there have been no dividends. In addition, JJ’s bonus, which is based on a combination of controlling average total production costs and quality control, has all but been eliminated since the plant expansion. With respect to production costs, JJ and other production personnel are eligible for a bonus provided that total production costs do not exceed 43% of sales. Figure 2 contains the format of the report that is used to assess production efficiency and bonus calculations. JJ explains that the production process for brewing beer has been fundamentally the same for decades, as outlined in Appendix 1. The first two steps, i.e., milling and mash tun, account for 50% of the total production overhead costs. Tigua beer has a longer and more time-intensive production process up to the stage where the wort is created; this results in the Tigua beer consuming 100% more overhead