PROFIT NEGOTIATION Review this case carefully and answer the questions at the end of the case in detail. Frank Murray, a contract administrator in the Army Munitions Command, and Harry Akers, contracts manager for Electron Technical Associates, were in the process of negotiating a change to a fixed price contract for the production of 173 units of a highly complex type of firing control electronic equipment. The Command had recently issued a design change to the contract, requiring the replacement of a power tube and some associated circuitry; the cost of purchasing the power tube was a major portion of the direct cost. After several hours of discussion, Murray and Akers had agreed on a cost of $43,170 for accomplishing the change. The only topic left for negotiation was profit. Akers had proposed a profit of $5,180, or 12 percent - the same rate that the firm was receiving on the basic contract. At this point the following discussion took place: MURRAY: Harry, I'm afraid that twelve percent profit of yours is much too high for us. AKERS: Too high? What do you mean? That's what we're getting on the basic contract, isn't it? MURRAY: Sure, but that doesn't mean this change should get the same rate. AKERS: Why not? We've always received the same profit rate on changes that we had on the basic contract. MURRAY: Yes, but this change just isn't so complex. A lot of that cost is simply purchase of materials. AKERS: We've been getting twelve percent on most of our fixed price contracts - that's our standard rate. Complexity has nothing to do with it! MURRAY: Maybe so . . . But I consider that any procurement's an individual deal. It has to stand alone. And that includes changes, too. AKERS: The guy after you won't think so. If I agreed to less than twelve percent on this one, pretty soon we'd start having trouble getting twelve percent on our basic contracts. We have to hold the line on this one. If we don't we know we're going to be in real trouble sooner or later. MURRAY: Harry, look at it my way for a minute. I have to justify whatever profit we agree on to the contracting officer. If I can't he'll just reject the deal and we'll have to start all over. AKERS: That's just it! The only real justification you need is that we've received twelve percent on practically all our changes in the past. QUESTIONS: 1. Comment on the discussion between Mr. Murray and Mr. Akers. 2. Is this a reasonable justification? 3. What importance in contract negotiation is the effect of precedent? 4. What actions should Mr. Murray take