13. sourcing dispute22 Ralph’s Firm is a large, decentralized firm. Each major product group is manufactured and marketed by a separate division. The divisions are free to trade among themselves as opportunities arise. Each division is treated as an investment center. The managers’ compensation depends on the performance of their divisions, relative to expectations, and the performance of the firm as a whole. Division A has developed a new consumer product and is lining up final production plans. A critical subcomponent can be manufactured by division B or acquired from an outside supplier. Division A asked for formal bids. Three were received: division B bid 1,350 per hundred, Western Industries bid 950 per hundred, and Calzig bid 957 per hundred.

Western is a well-known, reliable subcontractor. Calzig is a competitor of division B.

The division A manager is ready to accept the Western bid but decided to check with division B one final time. The B manager insisted the bid of 1,350 was solid and would not be lowered. Business is picking up, the B manager explains, and the announced policy of pricing all products at full cost plus the usual 11% markup would be followed.

B’s variable cost appears to be about 850 per hundred. The B manager also pointed out that they helped in the product engineering work and "understood" that they would be the favored supplier if the product ever went into production. It was also pointed out that A’s projected profit margin was 420 per hundred, and this was based on an estimated price of 1,400 per hundred for the subcomponent in question. Before A has time to contact Western, an urgent message from central management arrives. Division B has complained to center that A is about to source with an outside supplier. The firm is forced to respond and has called a teleconference for the following morning. What should center do?