Zumwald Case 1 - Jiya_Chadha

Jiya Chadha ZUMWALD AG Case Analysis In the Zumwald case, we see a dispute between two divisions of the company. As the organization is somewhat vertically integrated, the Imaging Systems Division has the option of purchasing monitors from another division – Heidelberg, or to purchase the same monitors at a more competitive price from the external market. ISD has decided to purchase the monitors from Display Technologies. The underlying dispute is due to the performance measurement system. Each division is evaluated on the basis of ROIC- return on invested capital and sales growth. Thus, each division is fighting to get the maximum returns and profit. In order to solve this problem, goals for all divisions in the company must be aligned. One way to do this would be to clarify the goal and aim for an overall higher profit for Zumwald. Else, with individual profit centers and conflicting ideas on transfer pricing, there is often loss and profit shifted from one center to another with no overall positive impact on the firm. This is shown through the analysis below, in which analyze the various implications of the options. Price of X73: Variable Costs: Other Conversion Costs: Contribution Margin (before monitor):

340,000 -26,300 -72,000 =241,700

(140,000-117,700)

Option 1: ISD buys monitor displays from Display Technologies. Contribution Margin = 141,200 ( 241,700- 100,500) Option 2: ISD buys monitors internally Contribution Margin = 101,700 ( 241,700- 140,000) Gain in contribution Margin if purchased externally= 39,500 However, though ISD has an increased margin of 39,500, Heidelberg and ECD loose money unless they find external market to fulfill this demand. The CM for Heidelberg is = 90,000 (140,000 – 50,000) The CM for ECD is = 12,600 (21,600- 9,000) Total Contribution Margin lost without internal sales = 102,600 So 102,600 – 39,500 has a difference of 63,100 that Zumwald would be loosing in CM. The similar results can be attained via another approach where we look at the costs incurred had these been cost centers. Option 1 to buy from Display Technologies ISD : 100,500 Option 2: ISD buys monitors internally Heidelberg: 28400 ECD: 9000 Total Cost: 37,400 Difference in cost = 100,500 – 37400 = 63,100. The increase in costs for Zumwald overall if ISD does not purchase independently. Thus, even if Heidelberg reduced their price, they might ask ECD to reduce theirs, which would in turn lower overall profits. As a result, to encourage a view that takes into the benefit of the organization, the management should provide incentives on the profit of Zumwald as a whole. Perhaps ISD and Heidelberg should get a share of the profit. Thus, the divisions would work together in order to find the options that are most profitable for Zumwald.