The Ajax division of Gunnco Corporation, operating at capacity, has been asked by the Defco division of Gunnco to supply it with electrical fitting no. 1726. Ajax sells this part to its regular customers for $7.50 each. Defco, which is operating at 50 percent capacity, is willing to pay $5 each for the fitting. Defco will put the fitting into a brake unit that it is manufacturing on essentially a cost-plus basis for a commercial airplane manufacturer. Ajax has a variable cost of producing fitting no. 1726 of $4.25. The cost of the brake unit as being built by Defco follows:
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Purchased parts (outside vendors)
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$22.50
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Ajax fitting no. 1726
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5.00
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Other variable costs
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14.00
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Fixed overhead and administration
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8.00
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$49.50
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Defco believes the price concession is necessary to get the job.
The company uses return on investment and dollar profits in the measurement of division and division manager performance.
1. Assume that you are the division controller of Ajax. Would you recommend that Ajax supply fitting no. 1726 to Defco? Why or why not? (Ignore any tax issues.)
2. Would it be to the short-run economic advantage of the Gunnco Corporation for the Ajax division to supply the Defco division with fitting no. 1726 at $5 each? (Ignore any tax issues.)
3. Discuss the organizational and manager-behavior difficulties, if any, inherent in this situation.
As the Gunnco controller, what would you advise the Gunnco Corporation president do in this situation? (CMA, adapted)