Identify the options that the president could do in this situation.

Explain three possible reasons why there may not be agreement.

provide a final recommendation for this question.

CASE 11A-7 Transfer Pricing; Divisional Performance (4) LO11-5 Weller Industries is a decentralized organization with six divisions. The company's Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $7.50 each; the fitting has a variable manufacturing cost of $4.25. The company's Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $5 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows: Although the $5 price for the X52 fitting represents a substantial discount from the regular Page 589 $7.50 price, the manager of the Brake Division believes the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard "through the grapevine" that the airplane manufacturer plans to reject his bid if it is more than $50 per brake unit. Thus, if the Brake Division is forced to pay the regular $7.50 price for the X52 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Weller Industries uses return on investment (ROI) to measure divisional performance. The assignment is worth a total of 30 marks as follows: 1. Requirement 1: 7 marks a. Calculation (4 marks) b. Recommendation ( 1 mark) and explanation ( 2 marks) 2. Requirement 2: 7 marks a. Calculation (5 marks) b. Explanation (addressing relevant versus irrelevant costs) including recommendation ( 2 marks) 3. Requirement 3: 7 marks a. Calculation (6 marks) b. Should the managers be able to agree? Explain (1 marks) 4. Requirement 4: 7 marks a. Identify the options that the President could do in this situation (3 marks) b. Explain three possible reasons why there may not be agreement. ( 3 marks) c. Provide a final recommendation (1 mark)