ZUMWALD AG
Task:
1.Brief introduction of case & company
This case describes a transfer pricing issue that is common in decentralized, divisionalized firms.
The case raises issues about internal pricing and, more generally, the operation of a
decentralized management structure.
Zumwald AG, headquartered in Cologne, Germany, produced and sold a range of medical
diagnostic imaging systems and biomedical test equipment and instrumentation. The company
was organized into six operating divisions. Total annual revenues were slightly more than €3
billion.
2.Score Keeping: Please bring transparency into the figures
Definition: The accumulation and classification of data.
3.Attention Directing: What’s bizarre?
Definition: Reporting and interpreting information that helps managers to focus on operating
problems, imperfections, inefficiencies, and opportunities.
At Zumwald AG the performance targets are probably too challenging. According to the case,
this performance evaluation system was based on the financial achievement of each division for
return on invested capital (ROIC) and sales growth. This is the reason why the managers could
not agree one with the other. A possible solution would be to offer the rewards based on the
same indicators but at corporate level, not division level.
4.Problem Solving: Relate the figures to the management principles and propose a decision to
Mr. Fettinger.
Definition: Aspect of accounting that quantifies the likely results of possible courses of action
and often recommends the best course of action to follow.
What Zumwald AG needs is a clear direction of the goals of the company as a whole.
• After considering the total contribution from all divisions of Zumwald AG, we recommend
that internal sourcing is more beneficial than purchasing from outside source such as Display
Technologies.
• Although, the cost would be relatively less to ISD division if external supply is considered, the
goal of the managers should be the benefit of firm as a whole.
• The inequalities in costs can be balanced with transfer pricing if necessary.
• A better deal in terms of price can be negotiated from Heidelberg Division by proving a
potential in increased sales for ISD which will translate to higher sales for Heidelberg that will
reflect as a increase in their revenue.
In conclusion, internal supply from Heidelberg Division should be undertaken to increase the
contribution margin as a whole to the company.