Costs and Transfer Price

Topics: Costs, Price, Variable cost Pages: 8 (1794 words) Published: September 16, 2013
Assignment: Analyze the Case and answer the following questions:

Case Background

ZUMWALD AG produced and sold a range of medical diagnostic imaging systems and biomedical test equipment and instrumentation. Below were some data about the company * Consisted of 6 operating divisions

3 of them were:
* Imaging System Division (ISD) sold ultrasound and magnetic imaging system * Heidelberg Division (Heidelberg) sold high resolution monitors, graphics controllers and display subsystems 50% served ISD, 50% outside customer * Electronic Component Division (ECD) sold application specific integrated circuits and subassemblies. It was established as a captive supplier to other Zumwald divisions but now served outsider also

* Total revenue € 3 billion
* Highly decentralized basis management
* Division performance indicators were achievement of budgeted target Return on Invested Capital (ROIC) and sales growth * Partially vertical integrated
* Each division allowed to outsource the component

Imaging System Division (ISD) is going to launch new product namely X73

The 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 division’s engineers at full cost of time compensation.

To get a best price for its component, ISD did a bidding which involved Heidelberg. Unfortunately Heidelberg bidding price was much higher than outsider company, therefore ISD decided to buy from Display Technology Plc

Here is the bidding:

Supplier | Cost per X73 System (€) |
Heidelberg Division | 140,000 |
Bogardus NV | 120,000 |
Display Technologies Plc | 100,500 |

The decision triggered a dispute since Heidleberg felt that ISD did not show a team 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 are the calculation of Contribution Margin base on each suppliers’ bidding price:

Item| Bidding Supplier|
| Heidelberd| Bogardus| Display Tech|
Price X 73| 340,000 | 340,000 | 340,000 |  |  |  |  |
Direct Material| 140,000 | 120,000 | 100,500 | Other Component| 72,000 | 72,000 | 72,000 | Conversion cost|  |  |  |
Variable overhead| 27,000 | 27,000 | 27,000 | Fixed cost| 117,000 | 117,000 | 117,000 |  |  |  |  |
Total 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 profit compared to other offers. Heidelberg offered its standard price to ISD which would give ISD negative profit.

b. The Heidelberg Division?
In bidding, Heidelberg has to estimate 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 follow:

Item| Heidelberg|
| Current Bid| Competitive Bid|
Direct 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 |  |  |  |
Price to Offer| 140,000 | 66,500 |...
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