Siemens Electric Motor Works (A) Assignment Questions: 1.

Calculate the cost of the five orders in Exhibit-4 under the traditional and new systems. Hint: first calculate the cost of processing an order and handling a special component. The cost of the five orders in Exhibit-4 under the traditional and new systems is shown below. This shows that the cost of each motor increases as the number of special components increases.
Old System A B $247.00 $247.00 $32.20 $64.40 $279.20 $311.40 $97.72 $108.99 $376.92 $3,769.20 $7,538.40 $37,692.00 $420.39 $4,203.90 $8,407.80 $42,039.00

Order Base Motor Cost Special Compoenent Cost Total Materials & MFG Costs Support Related Overhead Number of Special Components 1 10 20 100

C $247.00 $96.60 $343.60 $120.26 Cost $463.86 $4,638.60 $9,277.20 $46,386.00

D $247.00 $161.00 $408.00 $142.80 $550.80 $5,508.00 $11,016.00 $55,080.00

E $247.00 $322.00 $569.00 $199.15 $768.15 $7,681.50 $15,363.00 $76,815.00

To properly calculate of the five orders under the new system, we must first calculate the cost of order processing and special components is calculated using cost of each divided by the cost driver. Special components cost is driven by the number of times processed and the cost of order processing is driven by the number of orders. This calculation shows that the cost per special order processed is $60.00 and the cost of each order processed is $210.29. Cost of processing and handling

Special Components Order Processing

Cost (000) $19,500.00 $13,800.00

New System A B $304.00 $304.00 $39.60 $79.20 $60.00 $120.00 $210.29 $210.29 $613.89 $713.49 $3,706.29 $4,162.29 $7,142.29 $7,994.29 $34,630.29 $38,650.29

Amount 325,000 65,625

Rate $60.00 $210.29

Order Base Motor Cost Special Motor Costs Special Component Handling Order Processing Costs Cost

1 10 20 100

C $304.00 $118.80 $180.00 $210.29 $813.09 $4,618.29 $8,846.29 $42,670.29

D $304.00 $198.00 $300.00 $210.29 $1,012.29 $5,530.29 $10,550.29 $50,710.29

E $304.00 $396.00 $600.00 $210.29 $1,510.29 $7,810.29 $14,810.29 $70,810.29

2. Calculate traditional and new system costs for each order if 1 unit, 10 units, 20 units, or 100 units are ordered. Graph the product costs against volume ordered. Cost per unit under the old system is flat regardless of number of units ordered. However, under the new system, the cost per unit is about the same as they are for the old system for orders greater than 10. But 74% of the orders have less than 5 units resulting in very disproportionate numbers. Thus, the new system more accurately represents to true cost of fulfilling each order. Siemens should discourage small orders and incent customers to order in quantities greater than 10 to reduce per unit costs through premium pricing small orders and/or discounting larger orders.

3. Does the new system support the strategy of the firm in ways that the traditional system cannot? Is Mr. Karl-Heinz Lottes overestimating the value of the new system? The traditional cost system worked until management realized the systems inability to capture the relation between the increased support costs and the change in product mix. As the demand for production of special motors increased, the traditional cost system was not set up to appropriately allocate costs. Under the new system, the overhead is allocated efficiently which minimizes the cost

burden on motors overall. The calculations above show that the new systems identification of support costs driven by special component and order processing is effective. This type of system is essential to EMWs new strategy to succeed. Through this data, EMW was able to operate at 115% of capacity and through identifying which orders would provide the most profitability. The old systems flat rate costing would have discouraged such decision making and ensured the strategys failure. This is proof that Mr. Karl-Heinz Lottes is justified in his estimation of the new systems value.