Celtex is a large and very successful decentralized specialty chemical producer organized into five independent investment centers. Each of the five investment centers is free to buy products either inside or outside the firm and is judged based on residual income. Most of each division’s sales are to external customers. Celtex has the general reputation of being one of the top two or three companies in each of its markets.
Don Horigan, president of the synthetic chemicals (Synchem) division, and Paul Juris, president of the consumer products division, are embroiled in a dispute. It all began two years ago when Juris asked Horigan to modify a synthetic chemical for a new household cleaner. In return, Synchem would be reimbursed for out- of- pocket costs. After Synchem spent considerable time perfecting the chemical, Juris solicited competitive bids from Horigan and some outside firms and awarded the contract to an outside firm that was the low bidder. This angered Horigan, who expected his bid to receive special consideration because he developed the new chemical at cost and the outside vendors took advantage of his R& D.
a. Calculate the incremental cash flows to Celtex if the consumer products division obtains Q47 from Synchem versus Meas Chemicals.
b. What advice would you give Debra Donak?