The Lorax Electric Company is organized into several autonomous divisions. Corporate management is pleased with the results of decentralization and evaluates divisions on profits and return on investment. The devices division, currently operating at capacity, has been asked by the system division to supply a large quantity of integrated circuit IC378. Devices currently sells this circuit to its regular customers at $40 per hundred. The systems division, which is operating at about 60 percent of capacity, wants this particular component for a digital clock system. It has an opportunity to supply large quantities of these digital clock systems to Centonic Electric, a major producer of clock radios and other popular electronic home entertainment equipment. This is the first opportunity any of the Lorax divisions have had to do business with Centonic Electric. Centonic Electric has offered to pay $7.50 per clock system. The systems division prepared an analysis of the probable costs to produce the clock systems. The amount that could be paid to the devices division for the integrated circuits was determined by working backward from the selling price. The cost estimates employed by the division reflected the highest per unit cost the system could incur for each cost component and still leave a sufficient margin so that the division's income statement could show reasonable improvement. The cost estimates are summarized at the top of the next page. As a result of this analysis, the systems division offered the devices division a price of $20 per hundred for the integrated circuit. The bid was refused by the manager of the devices division, because he felt the systems division should at least meet the price of $40 per hundred that regular customers paid. When the systems division found that it could not obtain a comparable integrated circuit from outside vendors, the situation was brought to an arbitration committee, set up to review such problems. The arbitration committee prepared an analysis showing that $0.15 would cover variable costs of producing the integrated circuit, $0.28 would cover full cost including fixed overhead, and $0.35 would provide a gross margin equal to the average gross margin on all the products sold by the devices division. The manager of the systems division responded:" They could sell us that integrated circuit for $0.20 and still earn a positive contribution toward profit. In fact, they should be required to sell at their variable cost of $0.15 and not be allowed to take advantage of us."