Defco Division of Gunnco Corporation requests of Omar Division a supply of Electrical Fitting 1726, which is not available from any other source. Omar Division, which is operating at capacity, sells this part to its regular customers for $7.50 each. Defco, operating at 50% capacity, is willing to pay $5 each for this fitting. Defco needs the fitting for a brake unit that it plans to manufacture on essentially a cost basis for an aircraft manufacturer.
Omar Division produces Electrical Fitting 1726 at a variable cost of $4.25. The cost (and sales price) of the brake unit to be built by the Defco Division is as follows:

Defco believes that the price concession is necessary to obtain the job from the aircraft manufacturer. Gunnco uses return on investment and dollar profits in measuring division and division manager performance.
Required:
(1) Recommend whether or not Omar Division should supply Electrical Fitting 1726 to Defco Division. (Ignore income tax.)
(2) Discuss whether or not it would be a short-run economic advantage to Gunnco Corporation for Omar Division to supply the Defco Division with Electrical Fitting 1726 at $5 each. (Ignore income tax.)
(3) Discuss the organizational and managerial behavior difficulties inherent in this situation and recommend to Gunnco's president how the problem should be handled.

Transcribed Image Text:

Purchased parts (outside vendors).. Omar Electrical Fitting 1726 Other variable costs Fixed factory overhead and $22.50 5.00 14.00 administrative expenses Total 8.00 $49.50