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 business Market 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 organization Siemen’s strategy: Complex production process Flexible Manufacturing Short runs of custom motors Small volume orders 44% of the motor produced are for large orders Contribution margin 19%

Contribution Analysis No of motors in OrdersRevenueMarginContribution 1 Small Small Small Large Large

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