Stanco Inc. is a decentralized organization with five divisions. The company's Electronics

Division produces a variety of electronics items, including an XL5 circuit board. The division

(which is operating at capacity) sells the XL5 circuit board to regular customers for $12.50 each.

The circuit boards have a variable production cost of $8.25 each.

The company's Clock Division has asked the Electronics Division to supply it with a large

quantity of XL5 circuit boards for only $9 each. The Clock Division, which has enough idle

capacity, will put the circuit boards into a timing device that it will produce and sell to a large

oven manufacturer. The cost of the timing device being manufactured by the Clock Division

follows:

XL5 circuit board (desired cost) $9.00

Other purchased parts (from outside vendors) $30.00

Other variable costs $20.75

Fixed overhead and administrative costs $10.00

Total cost per timing device $69.75

The manager of the Clock Division feels that she can't quote a price greater than $70 per timing

device to the oven manufacturer if her division is to get the job. As shown above, in order to

keep the price at $70 or less, she can't pay more than $9 per unit to the electronics Division for

the XL5 circuit boards. Although the $9 for the XL5 circuit boards represents a substantial

discount from the normal $12.50 price, she feels that the price concession is necessary for her

division to get the oven manufacturer contract and thereby keep its core of highly trained people.

The company uses return on investment (ROI) to measure divisional performance.

Required 4:

Discuss the organizational and manager behaviour problems, if any, inherent in this situation.

What would you advise the company's president to do in this situation?