Aurora Manufacturing has multiple divisions that make a wide variety of products. Recently the bearing division and the wheel division got into an argument over a transfer price. The wheel division needed bearings for garden tractor wheels. It normally buys its bearings from an outside supplier for $25 per set. The company's top management recently started a campaign to persuade the different divisions to buy their materials from each other whenever possible. As a result, Maria Hamblin, the purchasing manager for the wheel division, received a letter from the vice-president of purchasing that instructed her to contact the bearing division to discuss buying bearings from it.
To comply with this request, Maria called Terry Jerabek of the bearing division, and asked the price for 15,000 bearings. Terry responded that the bearings normally sell for $36 per set. However, Terry noted that the bearing division would save $3 on marketing costs by selling internally, and would pass this cost savings on to the wheel division. He further commented that his division was at full capacity, and therefore would not be able to provide any bearings right away. In the future, if he had available capacity, he would be happy to provide bearings.
Maria responded indignantly, "Thanks, but no thanks. We can get all the bearings we need from Falk Manufacturing for $24 per set." Terry snorted back, "Falk makes junk. It costs us $22 per set just to make our bearings. Our bearings can withstand heat of 2,000 degrees Celsius, and are good to within .00001 centimetres. If you guys are happy buying junk, then go ahead and buy from Falk."
Two weeks later, Maria's boss from the central office stopped in to find out whether she had placed an order with the bearing division. Maria answered that she would rather buy her bearings from her worst enemy than from the bearing division.
Instructions
Answer the following questions:
(a) Why might the company's top management want the divisions to start doing more business with one another?
(b) Under what conditions should management force a buying division to buy from an internal supplier? Under what conditions should management force a selling division to sell to an internal division, rather than to an outside customer?
(c) The vice-president of purchasing thinks that this problem should be resolved by forcing the bearing division to sell to the wheel division at its cost of $22. Is this a good solution for the wheel division? Is this a good solution for the bearing division? Is this a good solution for the company?
(d) Provide at least two other possible solutions to this problem. Discuss the merits and drawbacks of each solution.