Question 6

The Kansas City division of Great Plains corporation, operating at full capacity, has been asked by Jaydee division to supply it with electrical fitting n 1726. KC sells this part to its regular customers for $7.50 each. Jaydee , which is operating at 50% capacity, is willing to pay $5 each for the fitting. Jaydee will put the fitting into a break unit that is manufacturing on a cost-plus basis for a commercial airplane manufacturer.

KC has a $4.25 variable cost of producing fitting n 1726. The cost of the brake unit as built by Jaydee follows:

Purchase parts Outside vendors	$22.50
KC fitting n 1726	5.00
Other variable costs	14.00
Fixed overhead and administration	8.00
Total	49.50

Jaydee believes that the price concession is necessary to get the job.

The company uses ROI and dollar profits in measuring division and division manager performance.

Required:

1. If you were KCs division controller, would you recommend that it supply the fitting to Jaydee? Why or why not? (Ignore the income taxes).
2. Would it be to the short-run economic advantage of Great Plains corporation for KC division to supply Jaydee division with fitting n 1726 at $5 each? Explain your answer (Ignore income taxes).
3. Discuss the organizational and managerial behavior difficulties, if any, inherent in this situation. As Great Plains corporations controller, what would you advise the corporations president to do in this situation?