The Ajax Division of Gunnco Corp., operating at capacity, has been asked by the Defco Division of Gunnco Corp. to supply it with electrical fitting number 1726. Ajax sells this part to its regular customers for $7.50 each. Defco, which is operating at 50% capacity, is willing to pay $5.00 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 number 1726 of $4.25. The cost of the brake unit being built by Defco is as follows: mk52

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Purchased parts (outside vendors). Ajax fitting (1726)... Other variable costs Fixed overhead and administration $22.50 5.00 14.00 8.00 $49.50 Defco believes the price concession is necessary to get the job. The company uses return on investment and dollar profits in the measurement of the divisional manager's performance. Required: a Consider that you are the division controller of Ajax. Would you recommend that Ajax supply fitting number 1726 to Defco? (Ignore any income tax issues.) Why or why not? b Would it be to the short-run economic advantage of the Gunnco Corp. for the Ajax Division to supply Defco Division with fitting number 1726 at $5.00 each? (Ignore any income tax issues.) Explain your answer.