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Jiya Chadha

ZUMWALD AG Case Analysis



In the Zumwald case, we see a dispute between two divisions of the company. As the
organization is somewhat vertically integrated, the Imaging Systems Division has the option of
purchasing monitors from another division Heidelberg, or to purchase the same monitors at a
more competitive price from the external market. ISD has decided to purchase the monitors from
Display Technologies.

The underlying dispute is due to the performance measurement system. Each division is
evaluated on the basis of ROIC- return on invested capital and sales growth. Thus, each division
is fighting to get the maximum returns and profit. In order to solve this problem, goals for all
divisions in the company must be aligned. One way to do this would be to clarify the goal and
aim for an overall higher profit for Zumwald. Else, with individual profit centers and conflicting
ideas on transfer pricing, there is often loss and profit shifted from one center to another with no
overall positive impact on the firm. This is shown through the analysis below, in which analyze
the various implications of the options.

Price of X73: 340,000
Variable Costs: -26,300 (140,000-117,700)
Other Conversion Costs: -72,000
Contribution Margin (before monitor): =241,700

Option 1: ISD buys monitor displays from Display Technologies.
Contribution Margin = 141,200 ( 241,700- 100,500)
Option 2: ISD buys monitors internally
Contribution Margin = 101,700 ( 241,700- 140,000)

Gain in contribution Margin if purchased externally= 39,500

However, though ISD has an increased margin of 39,500, Heidelberg and ECD loose money
unless they find external market to fulfill this demand.
The CM for Heidelberg is = 90,000 (140,000 50,000)
The CM for ECD is = 12,600 (21,600- 9,000)
Total Contribution Margin lost without internal sales = 102,600

So 102,600 39,500 has a difference of 63,100 that Zumwald would be loosing in CM.
The similar results can be attained via another approach where we look at the costs incurred had
these been cost centers.

Option 1 to buy from Display Technologies
ISD : 100,500
Option 2: ISD buys monitors internally
Heidelberg: 28400
ECD: 9000
Total Cost: 37,400

Difference in cost = 100,500 37400 = 63,100. The increase in costs for Zumwald overall if ISD
does not purchase independently.
Thus, even if Heidelberg reduced their price, they might ask ECD to reduce theirs, which would
in turn lower overall profits. As a result, to encourage a view that takes into the benefit of the
organization, the management should provide incentives on the profit of Zumwald as a whole.
Perhaps ISD and Heidelberg should get a share of the profit. Thus, the divisions would work
together in order to find the options that are most profitable for Zumwald.

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