Brenda: Seth, I am trying to help you here. But there is no way that I can pay you $230 per unit. I have competitive bids from other vendors for about $170, and that difference means $1,200,000 in my bottom line. Because you helped me design the part, I am willing to split the difference and offer $200. This will help you ramp up your utilization and spread your fixed costs over a larger base. After all, we play for the same team, but there is a limit to the hit I can take.
Seth: I can do without help like that! I have been screaming at my sales guys to get full cost plus 15%, which is what I quoted you. I drew this line in the sand six months ago, and slowly but steadily it is paying off. I will be undercutting my own instructions if I give you the part for what you are asking. At $200, I barely break even and only if I eat the $240,000 I spent in designing the part and making mock-ups. Already, morale is low because we did not make bonus last year. Pricing at cost is a sure way for not making it this year as well.
Seth and Brenda are division managers for a large manufacturing firm that makes many different kinds of appliances. The firm operates on a decentralized basis, and division managers have considerable autonomy in pricing and sourcing. They also are held accountable for meeting divisional goals, usually set at stretch levels. Bonus compensation heavily weights divisional performance, although a portion (e.g., stock options) depends on corporate performance.
The highlighted dispute centers on an innovative part that Seth’s components division had designed in collaboration with Brenda’s refrigerator division. While there was no payment for the design, the intent was that Seth’s outfit would be the front-runner in the bidding. However, Seth’s bid of $230 per unit (for 20,000 parts annually) was substantially above other bids. The conversation excerpted above summarizes the heated exchange between the two managers.
Brenda is annoyed because she thinks she is doing Seth a favor and that he is looking a gift horse in the mouth. She knows that his division is operating at about 70% of capacity only and that his sales force is scrambling to find orders. This component would substantially increase Seth’s utilization. Brenda also has a desire to keep the relationship alive because Seth’s engineers have proved adept at solving thorny technical issues and his quality is decidedly better than that provided by his competitors.
Seth is upset too. He knows that Brenda would have paid for the design anywhere else. Moreover, he thinks that she saves a bundle with higher component quality. He points out that 15% is the average long-run rate of return for his segment of the industry.
For his coup d’etat, he whips out an accounting statement that shows the component’s variable manufacturing cost at $125 and allocated manufacturing overhead at $75 per part. He even ignored selling expenses (usually 10% of selling price) when arriving at the bid! He is planning to appeal to their joint boss to force Brenda to buy the part at $230.

Required:
a. Relative to buying for an outside supplier at $170 per unit calculates the change in the profit reported by Seth’s division and the firm as a whole if Brenda buys the component from Seth for $170 per unit. Repeat at prices of $200 and $230 per unit. Ignore any savings in Brenda’s plant due to higher quality.
b. What advice would you provide the corporate VP, who has Brenda and Seth as her direct reports? When formulating your recommendation, please be sure to consider Seth and Brenda’s motivations for their respective stance.