Stratford Industries, Inc., has a foreign operation with the following

Question
Stratford Industries, Inc., has a foreign operation with the following current year income statement (amounts in foreign currency, FC):  Sales revenue…………………………….5,750,000 Variable operating costs…………..(3,450,000) …………………..2,300,000 Fixed operating costs………………..(1,800,000) Operating profit…………………………….500,000 Interest expense………………………….(200,000) Profit before tax……………………………..300,000 Income taxes………………………………….(60,000) Net profit………………………………………..240,000 Corporate management has decided to evaluate the performance of the manager of the foreign operation on the basis of controllable profit. The following information has been gathered to assist in calculating controllable profit for the current year:  A national labor strike in the foreign subsidiary’s home country caused it to shut down operations for one week, resulting in lost production of 1,000 units. Weekly fixed operating costs are FC 35,000.  Stratford required the foreign subsidiary to sell 25 percent of its output to an affiliated company in Japan at a price of FC 100 per unit, even though all of the foreign subsidiary’s output could have been sold locally at a price of FC 120 per unit.  The host government requires companies to purchase 20 percent of component parts from local manufacturers. As a result, the foreign subsidiary paid FC 60,000 more for parts in the current year than if it had been allowed to import 100 percent of parts needed.  Stratford requires the foreign subsidiary to borrow FC from its sister company in Switzerland at an annual interest rate of 10 percent, even though local banks charge 6 percent interest on similar loans.  Develop an estimate of the amount of controllable profit to be used in evaluating the performance of the manager of Stratford’s foreign subsidiary for the current year.

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