Pierre Hunaut
Zumwald AG Case

Context: Zumwald produces systems for medical diagnosis and generates 3 billion Sales.

3 operational divisions vertically integrated with a strong decentralization of decisions. This means that the Transfer price is the market price. That is the base of our problem here. Divisions have the right to buy and to sell the components and products outside the global firm.
Basic map of the firm: ECD -> Heidelberg -> ISD
2 divisions are in conflict: ISD and Heidelberg

The first problem is a management problem: the organisation of the group is vertical and decisions are decentralised (managers have the right to outsource): this is according to ma a contradiction. When your firm is vertically integrated, it should be clear that you buy the components to your subsidiary. They are 3 profit centres, and economic indicators should not be taken into account for some division’s decisions. This is exactly the case for Peugeot who has bought the supplier called Faurecia, to secure the supply of components for their cars.

Key points for an intelligent decision: * The goal should be the maximization of the firm’s profit as a whole. The ideal would be to find a congruence goal * We should not consider sink cost (a point that ignore Paul) * We should also consider the quality and security of the supplier

We will consider 2 scenarios, if ISD buy the components to Display Tech and to Heidelberg:

BUY to DISPLAY | ISD | Zumwald | Sales | 340,000 | 340,000 | Variable Costs | 100,500 + 72,000 + 26,300 | 198,800 | Fixed Costs | 117,700 | 117,700 | Contribution | 141,200 | 141,200 |

BUY to HEIDELBERG | ECD | Heidelberg | ISD | Zumwald | Sales | 21,600 | 140,000 | 340,000 | | Variable Costs | 9,000 | 21,600+28,400 (1) | 140,000+72,000+26,300 | | Fixed Costs | 9,000 | 55,000 | 117,700 | 181,700 |