Siemens Electric Motor Works Case Study
Siemens Electric Motor Works is located in Germany and is one of the largest corporations that produce electrical products. As competition increased, the company was under constant pressure to decrease costs and gain a larger profit. The solution was a modified strategy to produce a lower volume of specialty products rather than the high volume of standard motors. This led to a major increase in support costs. The support costs are a set percentage of the cost of materials and labor. Under this traditional cost system, this meant that an increase in volume would then yield an increase in support costs. However, a disparity began to arise as high processing costs where associated with smaller custom orders. Thus, the company was led to modify the existing cost system in order understand the support cost and the product mix relationship.
As I analyze the change in strategy, (seen in exhibit 2 of the given case) 74% (48%+26%) consisted of orders for up to 4 motors (less than 5 motors). Additionally, the order distribution shows that only 3% of orders were for motors >99. This illustrates that the higher the %motors, the lesser the number of motors needed to be produced.
Such that, the production of many motors of the same mix allows EMW to decrease the production costs per unit. And the more custom and specialized the order, the more expensive the per unit cost became. This is demonstrated in your file on QuestionA (sheet) and I agree with your analysis. The total cost increased due to the increase in amount of materials, materials OH, direct labor, production OH, and support related OH.
In the PROKASTA system, the company created and identified new cost pools and distributed the costs of special components and the cost of processing that special component into the different cost pools. With the use of the traditional system, the unit cost of the motor remains the same regardless of order increase. I agree with your analysis,