The Tallahassee Division (TO) of Gulf South Corporation,
operating at capacity, has been asked by Jaydee division to supply it with
electrical fitting no. 1726. TD sells this part to its regular customers for
$15.00 each. Jaydee, which is operating at 50 percent capacity, is willing to
pay $10.00 each for the fitting. It will put the fitting into a brake unit that
it is manufacturing on a cost-plus basis for a commercial airplane
manufacturer.

TD has a $8.50 variable cost of producing fitting no. 1726.
The cost of the brake unit as built by Jaydee follows:

Purchased parts-outside
vendors……………………………………… $45.00

KC fitting no. 1726
………………………………………………………… 10.00

Other variable costs
…………………………………………………………… 28.00

Fixed overhead and administration
………………………………………. 16.00

Total……………………………………………………………………………….$99.00

Jaydee believes that the price concession is necessary to
get the job. The company uses ROI and dollar profits to measure divisional and
division manager performance.

Required

a. If you were TO’s di vision controller, would you
recommend that it supply fitting no. 1726 to Jaydee? Why or why not? (Ignore
any income tax issues.)

b. Is it to the short-run economic advantage of Gulf South
Corporation for TD to supply Jaydee with fitting no. 1726 at $10 each? Explain
your answer. (Ignore any income tax issues.)

c. Discuss the organizational and managerial behavior
difficulties, if any, inherent in this situation. As Gulf South Corporation ‘s
controller, what would you advise the corporation’s president to do in this
situation?