Zumwald Essay

771 Words4 Pages
CASE: Zumwald Zumwald case represents a typical example of a problem in relation to transfer pricing where companies of the consolidated company form individual profit centers and have a quarrel about mark-ups in the internal sales. In this case, three divisions of the company make up profit centers having considerable autonomy which is supported by bonuses based on each division’s achievement of budgeted targets. The division ISD is producing end products and using main components provided by inside supplier called Heidelberg. Looking at a step deeper in the supply chain, third division under the same company ECD produces subassemblies for Heidelberg amongst others. The consolidated corporation has substantially amount of internal sale derived from the component and subassembly sales but nevertheless, outsourcing is allowed. The problem in this case intertwined around the situation where the new product was designed by ISD and three potential component suppliers were invited to tender for supplying materials required in assembling the new product. Heidelberg’s quote was outstandingly more expensive from the second quote whereas the lowest quote was lower than Heidelberg can produce with zero gross profit even if ECD uses zero mark-up for the subassemblies which would be offered to Heidelberg. The reason for the one very low quote was that the supplier had recently entered the market. Zumwald is decentralized and ISD is willing to continue with the best bid which is far from the offer of the inside supplier, but the amount of independence in divisions seems to be creating conflicts instead of stimulating flowing cooperation and thinking of the common good. As stated on the lecture slides, “transfer pricing affects the revenues of the producing profit center, the costs of the buying profit center, and hence, the profits of both entities.” When transfer prices are

More about Zumwald Essay

Open Document