Siemens Case

Questions:

Consider the five illustrative motor models in Exhibit 3. Under the former (traditional) system, what would the full cost of fulfilling an order for one unit of each model have been? What would have been the average cost per unit of each model if 10 units were ordered? 20 units? 100 units? What do your results suggest about the shortcomings of the old system with the new strategy?

Repeat the Question 1 calculations using the modified (PROKASTA) system. Have the shortcomings in the traditional system been addressed?

How significant are the differences in the average cost per unit between the modified system and the traditional system? (Respond by examining the ratio of modified to traditional cost for each of the twenty model-type/order-quantity combinations.)

Siemens's former cost system had 602 cost pools; the modified system added only two additional pools, through which a relatively small portion of overhead (DM33.3 million out of DM220.5 million total overhead) was assigned. Explain why such an apparently modest elaboration of an already complex cost system significantly changed the costs of certain model/quantity combinations.

Suggest how Siemens could further improve its system while at the same time reducing the total number of cost pools well below 604.

1.

From Exhibit 3:

Support-related overhead (modified):

Base motor: 57

Special component: 7.4

From Exhibit 2

Support-related overhead modified is 17% of total cost

Traditional is 26%

Therefore, Support-related overhead (traditional) is

Base motor: 87.2

Special component: 7.4 * 26 / 17 = 11.3

Total cost is 43.5 per special component, 334.2 per base motor.

Consider the five illustrative motor models , which is D, cost of one model is 334.2+43.5*5=551.7

Avg cost of 10 units of these: 334.2+(43.5*5)=551.7

Avg cost of 20 units of these: 334.2+(43.5*5)=551.7

Avg cost of 100 units of these: 334.2+(43.5*5)=551.7

SHORTCOMINGS: The cost is actually not the same. The profit does not match the cost.

2.

Two new cost for base motor and special component

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