Southern Glass manufactures glass bottles for a variety of products, including perfume bottles and liquor bottles. The company has two profit centers: production and labeling. The production department melts the raw materials, adding metal oxides to produce different colors if desired. It then uses a continuous rolling process to shape the bottles. Production then transfers the bottles to the labeling department at an average cost of $15 ($12 variable; $3 fixed) per case. The labeling department then paints or attaches labels on the bottles at an additional fixed cost of $1 and sells the labeled bottles on the external market at an average price of $30 per case.

Recently, a regional liquor manufacturer contacted the manager of the production department about purchasing of the 250,000 cases Southern Glass plans to make in April. The company would like production to start making their specially shaped bottles. They are willing to pay $28 per case. Making the special bottles would not affect the production departments cost but it would require cutting current bottle production by ; therefore, the labeling department would only label and sell 187,500 labels in April.

(1) Will the production department prefer to sell all 250,000 cases internally or sell (62,500) cases to the liquor manufacturing and (187,500) to the labeling department?

(2) Will the labeling department prefer to purchase all 250,000 cases internally or allow production to sell (62,500) cases to the liquor manufacturing?

(3) Will company profits be maximized if the production department sells all 250,000 cases internally or sells (62,500) cases externally and (187,500) internally?

(4) Why is there a goal congruence problem (hint: does everyone want the same option)?

(5) Provide one specific policy change that can solve the goal congruence problem illustrated in this example (at a minimum, there are three changes you only need to provide one). How does your policy change solve the problem?

HINT: Take one option at a time and consider each type of sales (if applicable) and costs.For example, for #1:

Transfer all bottles internally:

Sales (if applicable)

Variable costs

Fixed costs

Net Profit Sell

; Transfer :

Sales (if applicable)

Variable costs

Fixed Costs

Net Profit

Repeat the process for #2 and #3 using the applicable sales and costs.