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Case Analysis Zumwald Ag

542 words - 3 pages

Case  Analysis  :  Zumwald  AG     Zumwald   AG   is   a   German   company   specialized   in   the   production   and   retail   of   medical  equipment.  In  August  2002,  the  launch  of  a  new  ultrasound  imaging  system,  X73,   triggered  a  transfer  pricing  dispute  between  two  of  its  six  divisions,  ISD  and  Heidelberg.  A   third  division,  ECD  is  indirectly  involved  because  it  usually  provides  some  components  to   Heidelberg.       The  origin  of  the  dispute  between  Heidelberg  and  ISD  is  the  choice  of  supplier  for   some   components   of   the   X73.   Zumwald   has   a   culture   of   being   highly   decentralized   :   it   is   organized   in   six   operating   divisions   and   partially   vertically   integrated   however   the   company  policy  is  to  let  division  managers  choose  their  suppliers  internally  or  externally.   Nonetheless,   in   the   case   of   the   X73,   the   division   manager   of   ...view middle of the document...

 Mr.  Fettinger  must   also   keep   in   mind   that   Heidelberg   might   need   a   small   boost   because   of   its   activity’s   slowdown.           Given  these  elements,  I  would  advise  Mr.  Fettinger  to  offer  a  solution  fair  for  all  parties   and  in  the  best  interest  of  the  company.  IDC,  Heidelberg  and  EDC  should  meet  halfway.  It   is  in  the  best  interest  of  the  company  that  IDC  buys  part  of  the  necessary  components  from   Heidelberg.   Indeed,   since   the   company   is   vertically   integrated   and   Heidelberg   uses   the   components   produced   by   ECD,   when   Heidelberg   supplies   IDC   it   benefits   twice   the   company.   Furthermore,   Heidelberg   has   high   fixed   costs   (more   than   half   of   its   total   costs)   and  with  the  global  business  slowdown  30%  of  its  assembly  line  is  lying  idle.         However   the   current   offer   of   Heidelberg   (€   140,000)   is   unbearable   for   ICD.   Indeed,   it   would  be  selling  the  X73  at  a  loss  of  €  16,000  (€356,000  of  costs  for  a  retail  price  of  €340,000).   In  the  mean  time  Heidelberg  would  be  making  a  33%  margin  and  ECD  a  20%  margin!  With   the  Display  Technologies  offer,  ISD  makes  a  small  margin  of  7,5%.  However  it  is  impossible   for   Heidelberg   to   meet   the   offer   of   Display   Technologies   to   ISD   of   €   100,500.   Indeed   the   production  costs  of  Heidelberg  are  of  €  105,000  already.         A  fair  solution,  in  the  interest  of  the  company  as  a  whole  could  be  that  all  divisions  make   an   effort,   in   order   to   support   both   the   launch   of   a   new   product   by   ISD   at   a   competitive   price  and  the  slowdown  of  activity  for  Heidelberg.  This  solution  could  be  that  all  divisions   achieve  a  6%  margin  only  :  ECD  would  sell  its  components  at  €  19,080  to  Heidelberg  which   would  sell  its  components  at  €  108,650  to  ISD.  By  only  lowering  the  margin  of  ISD  by  1,5%   these  solution  would  keep  some  production  capacities  of  Heidelberg  and  ECD  from  lying   idle  and  spread  profits  evenly  among  the  divisions  involved.    

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