lauara
...upport costs. By mid-year 1988, Siemens realized there was a problem with the PROKASTA system. EMW was reporting major losses despite operating over capacity. The major cause was believed to be transfer pricing. There are 2 equations that Siemens uses to calculate transfer prices, one for profitable orders and one for unprofitable: Profitable orders: Transfer price = Factory Cost + 1/3 (profits) Unprofitable orders: Transfer price = Variable cost + ¨ú (contribution earned) The major flaw in Siemens accepting unprofitable orders in 1987 was the large amount of motors produced in these orders. In 1987, Siemens produced 44% of their motors on orders larger than 100 units. The main problems with orders > 100 motors were: 1) 87% of orders ¡Ã 100 motors had a sale price less than factory cost and were therefore unprofitable. 2) Orders more than 100 motors had less than a 20% contribution margin. Also in 1987, Siemens produced 31% of their motors on orders between 20-99 units. The main problems with orders between 20-99 units were: 1) 56% of orders resulted in sale price less than factory cost and were therefore unprofitable. 2) Orders of 20-99 motors had about a 27% contribution margin. Summary: In 1987, 75% of motor produced ...