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Question 2
Heidelberg engineers helped ISD develop the X73.
Heidelberg was reimbursed for the cost of those
engineers, but it earned no profit for this work.
Does this assistance imply a partnership that would
include future sourcing of parts?
Revenue for one X73 system €340,
000
€340
€241
€117
€124
€141
Question 3
The case has enough information to show that this X73 business promises to be
highly profitable for ISD
Question 3
Clearly there is room to force ISD to pay Heidelberg
more than the Display Technologies’ price. That extra
cost could provide additional margin to Heidelberg and
ECD. But, alternatively, any price greater than €37,400
provides a contribution to Heidelberg and/or ECD.
Why shouldn’t Heidelberg shave its price to get this
internal business?
And if Heidelberg shaves its price, then it might well ask
ECD to shave its price below its normal 20% mark-up. So in
some sense, these transfer prices are just moving profits from
one division to another.
Question 3
Heidelberg’s manager, Paul Bauer, claims that he has been
pleading with his salespeople not to shave prices, that he
needs full margin business in order to achieve his plan.
Does Mr. Bauer just not want to acknowledge the price
competition in this segment of the market?
Is he ignorant of the marginal cost and contribution margin
concepts?
Should he be fired?
Or is Mr. Bauer merely willing to lose this business in order to
emphasize the importance of his pricing policy to his
salespeople?
Price Unit Total
Question 3
Maybe because of market conditions and customer price sensitivities, Heidelberg is better off giving up
some business to retain higher margins, even though they are operating in a below-capacity condition.
What should Fettinger DO?
If the managers are all making rational arguments, then strong arguments
can be made here for having Mr. Fettinger do nothing.
Zumwald operates in a highly decentralized fashion.
Why not let it continue to do so?
Let the managers have their autonomy and freedom of sourcing.
If there is a deal to be made, let the managers work it out themselves.
If this deal were a more substantial part of Zumwald’s total business, then
a stronger argument could be made for intervention.
But this deal, by itself, is worth less than 5% of each division’s revenues.
Heidelberg can probably earn the business by cutting its price to Display
Technologies, but maybe it is not in its best interest to do so, even though
internal sourcing of this deal seems to be in Zumwald’s best interest.
Is Zumwald Management faulty?
motivates managers to make decisions that are not
in the best interest of the corporation as a whole!
Answer to that!
In most situations where local knowledge and fast decision-
making is important:
a highly decentralized system has great advantages.
But with decentralization comes risks of sub-optimization.
This case provides one common example of
suboptimization.
Such a policy could require internal transfers to be, for
example, at best outside market price, or at full (or variable)
cost plus a normal markup. But would such policies really
lead to better organizational decision-making?
Answer Continued
A policy like Zumwald’s could require internal
transfers to be
at best outside market price
or at full (or variable) cost plus a normal markup.
Conclusion
Zumwald’s is better off if the sourcing is done
internally.