Zumwald Case

628 Words Apr 26th, 2014 3 Pages
Zumwald AG case

Zumwald produced and sold a range of medical diagnostic imaging systems, biomedical test equipment and instrumentation. The firm has a divisional structure and a highly decentralized basis. Managers of each division have lot of autonomy in decision-making and they are compensated based on achievement of budgeted targets and ROIC. Moreover, Zumwald is vertically integrated (some divisions produce components that are essential to the others). Thus three divisions involved in the dispute are very interdependent because both Heidelberg and ECD can manufacture components for ISD’s new product and both of these two divisions are dependent on business from inside of the company to succeed. (That does not seem
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(Fixed costs are not relevant for the firm level decision). So there is a contribution of 90,000 € to Heidelberg (140 000-50 000) In addition there is a contribution of 12,600€ for ECD (21 600 – 9000). The advantage to ISD of sourcing from Display Technologies rather than Heidelberg is 39,500 €. That is far smaller than the total contribution to Zumwald divisions of 102,600€ that would be unavoidable if Heidelberg does not get this order.

- Communication is essential between the divisions and more especially when the company has to define the transfer pricing policy. Although the transfer pricing of Heidelberg is high, it would be interesting to force the two divisions to discuss and find a compromise on price. A potential way of determining both Heidelberg and later ECD’s transfer prices, would be to use the incremental cost per unit. Each division has excess capacity to spare and would not be forgoing potential sales by selling internally at a lower price. Although the company risks alienating external suppliers, as it stands now the product only represents 5% of total revenue for each division involved. Thus it is not likely to anger potential suppliers initially. The market is competitive enough that if in the future the company needs to outsource, there will still be willing suppliers. - The company should consider alternative the reward and compensation system. Until now, Zumwald was using incentives based

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