Zumwald Case
Zumwald AG
Management Accounting
Background:
Zumwald AG, headquartered in Cologne, Germany, produced and sold a range of medical diagnostic imaging systems and biomedical test equipment and instrumentation. The company was organized into six operating divisions. Total annual revenues were slightly more than €3 billion.
Zumwald manages ran the company on a highly decentralized basis. The managers of each division were allowed considerable autonomy if their performances were at least on plan. Performance was evaluated, and management bonuses were assigned, based on each division’s achievement of budgeted targets for return on invested capital (ROIC) and sales growth. Even though the company was partly vertically integrated, division managers were allowed to source their components from external suppliers if they so chose.
In August 2002, a pricing dispute arose between the managers of 3 of the divisions of Zumwald AG: Imaging Systems Division (ISD), the Heidelberg Division (Heidelberg), and the Electronic Components Division (ECD).
The case describes a transfer pricing issue that is common in decentralized, divisionalized firms. The case raises issues about internal pricing and, more generally, the operation of a decentralized management structure.
Analysis 1:
If we see the facts that came out in ensuing the discussion:
[pic]
It is obvious why ISD take Display tech as their supplier, a total cost difference of € 39,500. Thus, Heidelberg price would result in ISD negative gross margin.
Even though if we look in terms of contribution margin, ISD will still get positive numbers if they took the display monitor from Heidelberg, but looking at the objective of having the X73 as the next best thing in a competitive market, longer term it would not be viable for ISD to continue having a negative gross margin.
Analysis 2:
Now if we try to analyze further on Heidelberg and ECD facts:
[pic]
Looking at the top part, look like Heidelberg
Management Accounting
Background:
Zumwald AG, headquartered in Cologne, Germany, produced and sold a range of medical diagnostic imaging systems and biomedical test equipment and instrumentation. The company was organized into six operating divisions. Total annual revenues were slightly more than €3 billion.
Zumwald manages ran the company on a highly decentralized basis. The managers of each division were allowed considerable autonomy if their performances were at least on plan. Performance was evaluated, and management bonuses were assigned, based on each division’s achievement of budgeted targets for return on invested capital (ROIC) and sales growth. Even though the company was partly vertically integrated, division managers were allowed to source their components from external suppliers if they so chose.
In August 2002, a pricing dispute arose between the managers of 3 of the divisions of Zumwald AG: Imaging Systems Division (ISD), the Heidelberg Division (Heidelberg), and the Electronic Components Division (ECD).
The case describes a transfer pricing issue that is common in decentralized, divisionalized firms. The case raises issues about internal pricing and, more generally, the operation of a decentralized management structure.
Analysis 1:
If we see the facts that came out in ensuing the discussion:
[pic]
It is obvious why ISD take Display tech as their supplier, a total cost difference of € 39,500. Thus, Heidelberg price would result in ISD negative gross margin.
Even though if we look in terms of contribution margin, ISD will still get positive numbers if they took the display monitor from Heidelberg, but looking at the objective of having the X73 as the next best thing in a competitive market, longer term it would not be viable for ISD to continue having a negative gross margin.
Analysis 2:
Now if we try to analyze further on Heidelberg and ECD facts:
[pic]
Looking at the top part, look like Heidelberg