Table of Contents Introduction 3 ASIC Division - Cost Pools 4 Cost accounting system at ASIC: 5 Internal and external customer: 6 Situation at ASIC division (as on March 1996) 7 Western Digital Proposal 7 Capacity Analysis 8 Diferential Manufacturing Cost Budget 10
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