Farm Equipment Ltd, a manufacturer of components used for heavy farm equipment, is organized along decentralized product lines with each manufacturing division operating as a separate profit center. Each manager has been delegated full authority over all decisions involving the sale of that division's output to both third parties and other Farm Equipment divisions.

Two of these divisions are the Large Parts Division and the Small Parts Division.

The Large Parts Division produces a tractor engine component. To make that part requires a Part Number 303X that is manufactured by the Small Parts Division. In the past, the Large Parts Division purchased part 303X from the Small Parts Division for $14,000 per unit. However, the manager of the large parts division decided to purchase a similar part from an outside vendor for $13,500.

The manager of the Small Parts Division is surprised by this decision since his division will not be able to use the released capacity if it stops supplying the Large Parts Division.

The small parts division manager asks Farm Equipment's senior management for support, but is told that due to company policy, top management cannot interfere in any decisions made by division managers.

Additional data:

The sale price of the large parts division of the tractor engine component is $18,000. In addition to the cost of the 303X part, you also incur $1,000 per unit of additional variable costs and $1,000 per unit of fixed (allocated) costs.

The Small Parts Division's variable cost per unit to produce part 303X is $11,500. The Small Parts Division's fixed (allocated) cost per unit is $2,500.

Required

1. Evaluate top management's decision and provide a brief justification for your evaluation using the following criteria:

a) congruence of objectives;
b) evaluate the performance of the division;
c) motivate the management effort; and
d) preserve the autonomy of the division.
Support your answer with the corresponding calculations.

2. Should senior management intervene? Why or why not? Discuss briefly.