The Ajax division of Pylos Corporation, operating at capacity, has been asked by the Naxos di- vision to supply it with part 123. Ajax sells this part to its customers for $7.50 each. Naxos, operating at 50 percent capacity, is willing to pay $5.00 for each unit. Naxos will put the unit into an assembly that it will manufacture on a cost-plus basis for an outside manufacturer if it wins the bid. Naxos has no other source of supply for part 123.
Ajax has a variable cost of producing part 123 of $4.25. The cost of the assembly being built by Naxos is:
Purchased parts-outside vendors ....................... $22.50
Pay Ajax for part 123 ...................................... 5.00
Other variable costs ........................................ 14.00
Fixed overhead ............................................. 8.00
Total cost .................................................... $49.50
Naxos believes $49.50 is the maximum price that can be included in the bid.
Required:
1. As controller of Ajax, would you recommend that Ajax supply Naxos with part 123?
2. Would it be to the short-run advantage of Pylos for Ajax to supply Naxos?