Imaging System Division Essay

3 of them were* Imaging System portion (ISD) sold sonography and magnetic imaging system * Heidelberg Division (Heidelberg) sold high resolution monitors, artistic creation controllers and display subsystems 50% served ISD, 50% outside customer * Electronic element Division (ECD) sold finish specific integrated circuits and subassemblies. It was established as a captive supplier to other Zumwald divisions but this instant served outsider also* natural revenue 3 billion* Highly decentralized basis caution* Division performance indicators were achievement of budgeted target Return on Invested Capital (ROIC) and sales growth * start up vertical integrated* Each division allowed to outsource the componentImaging System Division (ISD) is way out to launch new product namely X73The characteristic of X73 was as follow* It was a new ultrasound Imaging system* The product was faster, cheaper and more compact* Design was supported by Heidelberd divisions engineers at full be of ti me compensation.To get a best monetary value for its component, ISD did a bid which involved Heidelberg. Unfortunately Heidelberg bidding monetary value was much higher thanoutsider corporation, therefore ISD decided to pervert from expose technology PlcHere is the biddingSupplier Cost per X73 System () Heidelberg Division 140,000 Bogardus NV 120,000 Display Technologies Plc 100,500 The close triggered a dispute since Heidleberg felt that ISD did non show a team work in this racing shell.1. What sourcing decision for the X73 materials is in the best vex of a. The Imaging Systems Division?Base on the pricing structure X73 to a lower place are the calculation of Contribution shore base on each suppliers bidding harm relic Bidding Supplier Heidelberd Bogardus Display Tech set X 73 340,000 340,000 340,000 at once Material 140,000 120,000 100,500 different Component 72,000 72,000 72,000 Conversion cost inconstant overhead 27,000 27,000 27,000 Fixed cost 117,000 117,000 117,000 Total cost 356,000 336,000 316,500 remuneration 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 social unit of X73, ISD would get highest profit compared to other offers. Heidelberg offered its standard price to ISD which would keep back ISDnegative profit.b. The Heidelberg Division?In bidding, Heidelberg has to betoken how its competitors bid prices would be before determining its price. Hiedelber has to put only relevant cost plus a certain markup for profit to win. 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 Conversion cost Variable overhead 28,400 28,400 Fixed cost 55,000 Total cost 105,000 50,000 Markup (33%) 35,000 16,500 equipmen t casualty 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 pay it anyway. As its capacity currently was 70%, there was no luck cost to be added. Therefore the actual lower bound Heidelberg could offer was 50,000. However that price would give zero profit to Heidelberg. To subscribe to the profit positive, Heidelberd could do some markup (eg. 33%). This profit was beneficial for Heidelberg to spine some fixed cost.c. The Electronic Components Division?ECD has been set as internal supplier whose pricing has been similar to that purpose. with 20% marked up from Absorption cost.This was actually the proper reassign pricing for the company in supplying to other 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 launching o f X73, Zumwald would get profit only from ISD Division amounting of 23,500, as describe 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 with Transfer 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 Co nversion 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 generate more profit either Heidelberg offered current price or transfer price, 2. With first scenario ISD division would suffer for a 16,000 scattered 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 transfer cost allowed ISD to lower the price so that X73 could better compete in the market 6. Vertical integration chances should be set up and applied in Zumwald AG2. What should Mr. Fettinger do regarding the X73 sourcing issue?Considering some fa ctors as mentioned belowa. ICD has announced Display Tech as the winner.b. There was a decentralized policy among the division that Fettinger has to be respect for c. credibility issue of the company in the eyes of outside suppliers if Fettinger intervene in this case by ever-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 learning for him and management.However this consideration should not base on the amount of the business which was estimated to be small, because in my opinion for a competitive product such 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 the 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 knowing to motivate each of Zumwalds division man aging directors to take actions that are not only in the interest of their division but also in the best interest of Zumwald? Explain. It can. The Top Management should set a TRANSFER PRICES for internally transferred goods. However in decentralized organization such as Zumwald AG, the managing directors and his teams often submit considerable autonomy in deciding whether to accept or reject orders or whether to buy inputs from privileged theorganization or from outside. Therefore the transfer pricing rule should promote a GOAL congruousness among the managing directors involved in the transfer Please refer to the schematic belowTop ManagementZumwald AGECDHeidelbergISDComponents transferred at a transfer priceComponents transferred at a transfer priceAssuming the transfer price is made, the transfer price ordain not affect the companys overall profit, nevertheless it does affect the profit associated with each division. As a consequence, the trasnfer pricing policy can affect th e decisions of autonomous managing directors who are deciding whether to make the transfer obtain of productive inputs from vendors outside the organization Sales of immaculate 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 finished goods to customers outside the organizationThere are customary rules that will promote Goal congruence which are divided into scenario 1. No excess capacityThe transfer price = disbursement cost + Opportunity costOutlay cost standard variable b usiness costOpportunity cost forgone contribution margin from the lost sales Goal congruence defend 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 higher up relevant cost. While Zumwald AG as the retention company would get benefit from both.2. With Excess CapacityTransfer price= Outlay costs (no opportunity cost to add) Outlay cost standard variable production cost ecumenical congruence* The seller will get zero contribution since it sells the product at its outlay cost, to make it goal congruence it is advisable to allow the seller to add a markup to this lower bound in order to provide a positive contribution margin * The buyer will get price at outlay costs which allow it to price lower to compete the market * The Holding 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 onward to compare or there is no need to do bidding at all. Heidelberg should use the above formula plus a reasonable 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.