Table of Contents
ASIC Division - Cost Pools4
Cost accounting system at ASIC:5
Internal and external customer:6
Situation at ASIC division (as on March 1996)7
Western Digital Proposal7
Diferential Manufacturing Cost Budget10
Sub Micron Devices started its operations in mind 1980s. The company was located in Phoenix, Arizona, and had 400 employees by early 1996. The ASIC division of Sub-Micron Devices manufactured application-specific integrated circuits. A large part of ASIC’s output was transferred internally to the Systems Division which sold electronically scanning equipment to a variety of industrial clients. Originally, ASIC started out as a supplier to the Systems Division. In the late 1980’s, however, it became clear that ASIC would be able to venture into the external business in addition to satisfying the needs of the Systems Division. As a consequence, ASIC was transformed from a cost center into a separate profit center. If we look at the reasons for the opportunity for additional external business, it resulted from substantial yield improvements that ASIC experienced between 1984 and 1990.By 1996 average yields had improved from 50% in the 1980s to about 85% in 1996.In 1996, ASIC had considerable excess capacity. In 1996, the ASIC division of the Sub Micron devices received an inquiry from the Western Digital to supply 3,000,000 chips annually for a period of three years at a price of $40/chip. The question in place now was whether the ASIC should supply the chips to Western Digital at $40/chip and whether the venture into external business would be profitable or not. To continue with the case analysis we will not try to find out if the new business opportunity for ASIC will be profitable or not. In order to be able to do this we will have a look at the way ASIC operated its business, the different cost pools at ASIC, situation at ASIC in 1996, the proposal from Western Digital and the possible alternatives.
ASIC Division - Cost Pools
The ASIC Division’s value chain consisted of two parts: Wafer Fab and Assembly. Wafer Fab:- Raw silicon wafers were processed in a sequence of processing steps. These activities required sophisticated equipment, well trained employees and a high level of cleanliness. The final step of the fabrication process consisted of cutting up the processed wafers into individual die. Assembly:- In Assembly the die were then completed and turned into ICs. This required the addition of electric connection, a casing for the die, and finally an electronic testing of the functionality of the chip. Assembly was more labor intensive than the Wafer Fab at the ASIC division. Cost Accounting System: - Fabrication and Assembly constituted separate cost pools, each of which collected direct and overhead costs. Also, both cost pools separated variable from fixed overhead costs. Overhead costs were the bigger part of the total costs. The crucial cost driver in the Wafer Fab was considered to be the number of moves. A move was defined to be the any significant alteration of the wafer. However, not all moves were of equal complexity. The moves were differentiated as regular and photolithographic moves. Specifically, it was estimated that resources spent on photolithographic moves were three times more than those spent on regular moves.
Cost accounting system at ASIC:
The manufacturing of an integrated circuit (IC) involves a raw wafer to pass through two stages – Fabrication and Assembly. The cost accounting system at ASIC maintains separate pools for these two...