McCormick Implements, a farm equipment manufacturer, is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal and external customers. The Tractor Division has always acquired a certain equipment component from the Iowa Division. However, when informed that the Iowa Division was increasing its unit price to $330, the Tractor Divisions management decided to purchase the component from outside suppliers at a price of $300.

The Iowa Division had recently acquired some specialized equipment that was used primarily to make this component. The manager cited the resulting high depreciation charges as the justification for the price boost. He asked the president of McCormick to force the Tractor Division to buy from Iowa at the $330 price. He supplied the following data to back his request.

Tractors annual purchases of component 3,000 units

Iowas variable costs per unit $285

Iowas fixed costs per unit $30

1) Suppose there are no alternative uses of the Iowa facilities (i.e., the plant will be idle). Will the company as a whole benefit if the Tractor Division buys from the outside suppliers for $300 per unit? What choice will the manager of the Tractor Division make?

2) Suppose internal facilities of Iowa would not otherwise be idle. Instead, the equipment and other facilities could be used to produce 3,000 other goods that would make a $61,000 contribution margin. Will the company as a whole benefit if the Tractor Division buys from the outside suppliers and the Iowa division produces the other goods? What choice will the manager of the Tractor Division make?

3) Suppose that there are no alternative uses for Iowas internal facilities and that the selling price of outsiders drops by $30. Will the company as a whole benefit if the Tractor Division buys from the outside suppliers? What choice will the manager of the Tractor Division make?

4) As the president, how would you respond to the request of the manager of the Iowa Division to intervene in this problem? Would your response differ, depending on the specific situations described in requirements 1 through 3 above? Why?