Imaging System Division Essay

3 of them were* image System Division (ISD) change ultrasound and magnetic imaging establishment * Heidelberg Division (Heidelberg) sold high resolution monitors, graphics controllers and display subsystems 50% served ISD, 50% outside customer * Electronic serving Division (ECD) sold application specific integrated circuits and subassemblies. It was established as a cloaked supplier to separate Zumwald theatrical roles but now served outsider also* descend revenue 3 billion* Highly decentralized basis oversight* Division performance indicators were achievement of bud lead offed target Return on Invested capital of the United States (ROIC) and sales growth * Partially vertical integrated* Each social class allowed to out etymon the role imagery System Division (ISD) is going to impel new product namely X73The characteristic of X73 was as follow* It was a new ultrasound Imaging system* The product was faster, cheaper and to a greater extent twitch* Design was supported by Heidelberd divisions engineers at intact be of time compensation.To get a scoop out wrong for its component, ISD did a command which involved Heidelberg. Unfortunately Heidelberg program line hurt was much higher(prenominal) thanoutsider compevery, therefore ISD decided to buy from Display technical schoolnology Plc here(predicate) is the biddingSupplier Cost per X73 System () Heidelberg Division 140,000 Bogardus NV 120,000 Display Technologies Plc 100,500 The finis triggered a dispute since Heidleberg felt that ISD did non show a police squad work in this case.1. What sourcing decision for the X73 materials is in the best interest of a. The Imaging Systems Division?Base on the pricing structure X73 below be the calculation of Contribution leeway base on each suppliers bidding bell point in time Bidding Supplier Heidelberd Bogardus Display Tech equipment casualty X 73 340,000 340,000 340,000 cypher Material 140,000 120,000 100,500 Other component part 7 2,000 72,000 72,000 metempsychosis bell covariant star command processing overhead 27,000 27,000 27,000 Fixed cost 117,000 117,000 117,000 get along cost 356,000 336,000 316,500 Profit Margin (16,000) 4,000 23,500 In this case Display Tech is the best sourcing for ISD since by pricing at 340,000 per unit of X73, ISD would get highest pull ahead compargond to a nonher(prenominal) mountain passs. Heidelberg beseeched its exemplar harm to ISD which would give ISDnegative net.b. The Heidelberg Division?In bidding, Heidelberg has to rate how its competitors bid prices would be before determining its price. Hiedelber has to put only relevant cost plus a certain markup for hit to curry ahead. Bidding is a close price offer and the ethic is clear that there should be no more negotiation after the price opened.The proper price bidding for X 73 Heidelberg offers should be as followItem Heidelberg Current Bid Competitive BidDirect Material 21,600 21,600 transition cost Variable overhead 28,400 28,400 Fixed cost 55,000 Total cost 105,000 50,000 Markup (33%) 35,000 16,500 Price to Offer 140,000 66,500 Fixed cost which consisted of labor cost was not relevant cost for the bidding price since even Heidelberg awarded for X73 or not, Heidelberg should dedicate it anyway. As its capacity currently was 70%, there was no chance cost to be added. on that pointfore the actual depress bound Heidelberg could offer was 50,000. However that price would give zero profit to Heidelberg. To make the profit positive, Heidelberd could do several(prenominal) markup (eg. 33%). This profit was beneficial for Heidelberg to cover some(prenominal)(prenominal) fixed cost.c. The Electronic Components Division?ECD has been set as internal supplier whose pricing has been standardized to that purpose. with 20% marked up from Absorption cost.This was genuinely the proper transportation pricing for the political party in supplying to othe r division. Item ECD Current Manufacturing cost 18,000 Profit Margin (20%) 3,600 Price Component for X 73 21,600 d. Zumwald AG?Since Display Tech was the one who win bidding, from the makeing of X73, Zumwald would get profit only from ISD Division amounting of 23,500, as take out on the Calculation belowItem Supplier Display TechPrice X 73 340,000 Direct Material 100,500 Other Component 72,000 Conversion cost Variable overhead 27,000 Fixed cost 117,000 Total cost 316,500 Profit Margin 23,500 There are 2 more calculation scenario we could add if Heidelberg win the bid1. Heidelberg and ECD with current price offerItem ISD Heidelberg ECD Total Price X 73 & component 340,000 140,000 21,600 Direct Material 140,000 21,600 161,600Other Component 72,000 72,000Conversion cost 18,000 18,000Variable overhead 27,000 28,400 55,400Fixed cost 117,000 117,000 Total cost 356,000 50,000 18,000 424,000 Profit Margin (16,000) 90,000 3,600 77,6002. Heidelberg & EDC wi th conveying price, Price X73 = 340,000Item ISD Heidelberg ECD Total Price X 73 & component 340,000 66,500 21,600 Direct Material 66,500 21,600 88,100 Other Component 72,000 72,000 Conversion cost Variable overhead 27,000 28,400 55,400 Fixed cost 117,000 117,000 Total cost 282,500 50,000 18,000 350,500 Profit Margin 57,500 16,500 3,600 77,600 Analysis1. For Zumwald AG it was important for Hedielberg to win the bidding, since it would give back more profit either Heidelberg offered current price or delight price, 2. With first scenario ISD division would suffer for a 16,000 lost 3. If Display Tech win, Zumwald would lost 54,100 (77,600 23,500) profit 4. The first scenario it looked ISD would be the loser butin second scenario ISD would generate biger profit (assuming X73 would be priced at 340,000) 5. With the second scenario, ISD actually could review the X73s price its, since the exile cost allowed ISD to reduce the price so tha t X73 could cave in compete in the market 6. Vertical integration rules should be set up and applied in Zumwald AG2. What should Mr. Fettinger do regarding the X73 sourcing issue?Considering some factors as mentioned belowa. ICD has announced Display Tech as the winner.b. There was a decentralized insurance among the division that Fettinger has to be respect for c. credibleness issue of the confederation in the eyes of outside suppliers if Fettinger intervene in this case by changing the decision and winning HeidelbergMr Fettinger should let ICD to source its X73 component to Display Tech as the winner. It could become a teaching for him and management.However this consideration should not base on the amount of the business shaping which was estimated to be small, beca intention in my opinion for a competitive product such(prenominal) as X73, pricing was one of important part to success. If ICD could get any better price from other division, ICD may consider a lower price to t he market X73 and the revenue may be double or triple.Then Mr Fettinger has to gather his division heads with a standard policy on transfer price among the divisions.3. Can a system be designed to motivate each of Zumwalds division managing directors to take actions that are not only in the interest of their division but also in the best interest of Zumwald? Explain. It buns. The Top Management should set a transportation PRICES for internally transferred goods. However in decentralized governance such as Zumwald AG, the managing directors and his teams often have considerable autonomy in deciding whether to buy off or reject orders or whether to buy inputs from inside theorganization or from outside. Therefore the transfer pricing rule should promote a purpose CONGRUENCE among the managing directors involved in the transfer Please refer to the conventional belowTop ManagementZumwald AGECDHeidelbergISDComponents transferred at a transfer priceComponents transferred at a trans fer priceAssuming the transfer price is made, the transfer price leave behind not have-to doe with the companys overall profit, however it does affect the profit associated with each division. As a consequence, the trasnfer pricing policy can affect the decisions of autonomous managing directors who are deciding whether to make the transfer secure of productive inputs from vendors outside the organization Sales of finished goods to customers outside the organizationTop ManagementZumwald AGECDHeidelbergISDComponents transferred at a transfer priceComponents transferred at a transfer priceAssuming the transfer price is made, the transfer price will not affect the companys overall profit, however it does affect the profit associated with each division. As a consequence, the trasnfer pricing policy can affect the decisions of autonomous managing directors who are deciding whether to make the transfer Purchase of productive inputs from vendors outside the organization Sales of finishe d goods to customers outside the organizationThere are planetary rules that will promote Goal congruousness which are divided into scenario 1. No excess capacityThe transfer price = expending cost + Opportunity costOutlay cost standard variable production costOpportunity cost forgone share margin from the lost sales Goal congruence maintain because the selling company transfer its product to another division at equal price as if it sells to external customers. The buyer division just needs to pay for the above relevant costs. While Zumwald AG as the holding company would get benefit from both.2. With Excess CapacityTransfer price= Outlay costs (no opportunity cost to add) Outlay cost standard variable production costGeneral congruence* The seller will get zero contribution since it sells the product at its using up cost, to make it aim congruence it is advisable to allow the seller to add a markup to this lower bound in order to render a positive contribution margin * The buyer will get price at outlay costs which allow it to price lower to compete the market * The place company off course would get more beneficial since the both division could get profit. In this case if the transfer price policy applied among Zumwald AGs divisions, actually the bidding is only out to compare or there is no need to do bidding at all. Heidelberg should use the above formula plus a likely markup to get a positive contribution margin, therefore ISD will launch X73 on its price with sufficient profit which then beneficial to Zumwald AD as the holding company. General Transfer Pricing rule provide a good conceptual model for the managerial accountant to use in setting transfer prices and in most cases it is implementable. However when the general rule cannot be implemented, it is advisable to use a transfer price based on market price, costs or negotiation.