Ashutosh Dash

Objective of the case:Explores

How a cost system can help support a firm's decision to change strategies

The organizational linkage between the product costing system and the transfer pricing system

Understand the businessMarket for Standard Motors:

Very competitive

Based on cost leadership

Large volume of standard motors

Simple production technology

Long runs

Is Siemens competitive here?????????

Understanding the organizationSiemen’s strategy:

Complex production processFlexible ManufacturingShort runs of custom motorsSmall volume orders

44% of the motor produced are for large orders

Contribution margin 19%

Contribution AnalysisNo of motors in

Orders Revenue MarginContributi

on

1 Small 64.35 0.49 31.5315

2-4 Small 74.25 0.52 38.61

5-19 Small 108 0.4 43.2 0.696254

Large 135 0.27 36.45

Large 68.4 0.19 12.996 0.303746

162.7875

Why do managers favour large orders?

Customer relationship

Strong presence in A/C motor market

Generating new custom business

Access new technology

Is EMW a profit center????

Why not a cost center –

No focus on cost reduction

Responsive to orders requiring flexibility

Trying to maximize difference between cost &

revenue

Incentive to produce products if profitable

Profitability of centers

EMW = Transfer Price Revenue – Manufacturing Cost

Sales = Revenue – Transfer Expenses - SGA

Transfer Pricing System

Accuracy of factory cost??

Contribution Basis for unprofitable products through central sales (why?)

- Reduces conflicts- Maintains product mix

Profit Basis for profitable Products directly between EMW and Sales

Does Siemens have a problem?Either

Transfer Pricing system is right and product mix is wrong

Or

Product mix has changed and transfer pricing parameters are out of whack

Concerns:Filled capacity with high volume orders

Volume Might be changing over time

Difficult to compare performance of responsibility centers under changing volume