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.
There were dispute among three of the company’s divisions: Imaging Systems Division (ISD), the Heidelberg Division (Heidelberg), and the Electronic Components Division (ECD). • ISD sold complex ultrasound and magnetic resonance imaging systems. These systems were expensive, typically selling for €500,000 to €1 million. • Heidelberg sold high resolution monitors, graphics controllers and display subsystems. Approximately half of its sales were made to outside customers. ISD was one of Heidelberg’s major inside customers. • ECD sold application specific integrated circuits and subassemblies. ECD was originally established as a captive supplier to other Zumwald divisions, but in the last decade its managers had found external markets for some of the division’s products. Because of this, ECD’s managers were given profit center responsibility.
In 2001, ISD designed a new ultrasound imaging system, called the X73. Hopes were high for X73. The new system offered users advantages in processing speed and cost, and it took up less space. Heidelberg engineers participated in the design of X73, but Heidelberg was compensated for the full cost of the time its employees spent on this project. After the specifications were set, ISD managers solicited bids for the materials needed to produce X73 components. Heidelberg was asked to bid to supply the displays needed for production the X73 system. So were two outside companies. One was Bogardus NV, a Dutch company with a reputation for producing high quality products. Bogardus had been a long-time supplier to Zumwald, but it had never before supplied display units and systems to any Zumwald division. Display Technologies Plc, was a British company that had recently entered the market and was known to be pricing its products aggressively in order to buy market share. The quotes that ISD received were as follows :
|Supplier |Cost per X73 System (€) | |Heidelberg Division |140,000 | |Bogardus NV |120,000 | |Display Technologies Plc |100,500 |
In the ensuing discussion, the following facts came out :
1. ISD’s tentative target price for the X73 systems was €340,000.2 2. Heidelberg’s standard manufacturing cost (material, labor and overhead) for each display system was €105,000. When asked, Mr. Halperin estimated that the variable portion of this total cost was only €50,000. He treated Heidelberg’s labor costs as fixed because German laws did not allow him to lay off employees without incurring expenses that were “prohibitively” high. 3. Because of the global business slowdown, the production lines at Heidelberg that would produce the systems in question were operating at approximately 70 percent of capacity. In the preceding year, monthly production had ranged from 60 to 90...
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