Zumwald Ag

Zumwald AG

Synopsis: Zumwald AG is a German company headquartered in Cologne, which produced and sold a range of medical diagnostic systems and biomedical test equipment and instrumentation. It released a new ultrasound imaging system in 2001 called X73 which became the root cause of a dispute between two of its divisions: ISD and Heidelberg. The company has a highly decentralized structure and managers have the liberty to make their supplier based decisions. They can choose internally or externally. In this case, manager of ISD chose an external supplier due to lower rates offered by them and manager of Heidelberg did not support this decision as he wanted ISD to choose Heidelberg as its supplier. The managing director of the company, Mr. Rolf Fettinger, has to solve the issue for Zumwald AG.

Explanation: Mr. Fettinger has to decide in the best interest of both divisions and the company as a whole. ISD has been doing very well when it comes to revenues but Heidelberg has been struggling. There is another division called Electronic Components division which is indirectly related to this case because it supplies components to Heidelberg.

ISD solicited bids to choose its suppliers in order to keep the costs in check. The quotes it received from the three suppliers were:

Supplier Cost per X73 system (€)

Heidelberg Division 140,000

Bogardus NV 120,500

Display Technologies Plc 100,500

ISD naturally chose Display Technologies since it quoted the lowest price per system. The price set by the managers was per X73 was €340,000. Other costs related to the system were fixed costs of €117,700 , conversion costs of €26,300 and other component costs of €72,000. So, ISD’s gross margin per X73 before the display screen can be calculated as follows:

Sales revenue €340,000

Less: Component costs (72,000)

Less: Conversion costs (26,300)

Less: Fixed costs (117,700)

Gross margin per X73 before display screen €124,000

Based on this information, contribution margin for ISD if it chooses Display