M4 Engineering has two divisions, the Fabrication Division and the Airplane Division. The Airplane Division may purchase engine mounting Clamps Fabrication Division or from outside suppliers. The Fabrication Division sells engine mounting clamps both internally and externally. The market price for is $5,000 per 100 mounting clamps. The following conversation took place between the controllers of the Fabrication Division and Airplane Division: • Airplane Division: I hear you are having problems selling mounting clamps out of your division. Maybe I can help. • Fabrication Division: You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity? After all, we are part of the same company. • Airplane Division: What kind of price could you give me? • Fabrication Division: Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $5,00 for 100 mounting clamps. • Airplane Division: I'm not so sure we can swing that. I was expecting a price break from a "sister" division. • Fabrication Division: Hey, I can only take this "sister" stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firm-market price. After all, it's only fair-that's what you would have to pay from an external supplier. • Airplane Division: Fair or not, I think we'll pass. Sorry we couldn't have helped Was the Airplane Division behaving ethically by trying to force the Fabrication Division into a price break?
M4 Engineering has two divisions, the Fabrication Division and the Airplane Division. The Airplane Division may purchase engine mounting Clamps Fabrication Division or from outside suppliers. The Fabrication Division sells engine mounting clamps both internally and externally. The market price for is $5,000 per 100 mounting clamps. The following conversation took place between the controllers of the Fabrication Division and Airplane Division: • Airplane Division: I hear you are having problems selling mounting clamps out of your division. Maybe I can help. • Fabrication Division: You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity? After all, we are part of the same company. • Airplane Division: What kind of price could you give me? • Fabrication Division: Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $5,00 for 100 mounting clamps. • Airplane Division: I'm not so sure we can swing that. I was expecting a price break from a "sister" division. • Fabrication Division: Hey, I can only take this "sister" stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firm-market price. After all, it's only fair-that's what you would have to pay from an external supplier. • Airplane Division: Fair or not, I think we'll pass. Sorry we couldn't have helped Was the Airplane Division behaving ethically by trying to force the Fabrication Division into a price break?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:M4 Engineering has two divisions, the Fabrication Division and the Airplane Division. The Airplane Division may purchase engine mounting clamps from the Fabrication Division or from outside suppliers. The Fabrication Division sells engine mounting clamps both internally and externally. The market price is $5,000 per 100 mounting clamps. The following conversation took place between the controllers of the Fabrication Division and Airplane Division:
- **Airplane Division:** I hear you are having problems selling mounting clamps out of your division. Maybe I can help.
- **Fabrication Division:** You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity? After all, we are part of the same company.
- **Airplane Division:** What kind of price could you give me?
- **Fabrication Division:** Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $5,000 for 100 mounting clamps.
- **Airplane Division:** I'm not so sure we can swing that. I was expecting a price break from a “sister” division.
- **Fabrication Division:** Hey, I can only take this “sister” stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firm—market price. After all, it's only fair—that's what you would have to pay from an external supplier.
- **Airplane Division:** Fair or not, I think we'll pass. Sorry we couldn't have helped.
**Was the Airplane Division behaving ethically by trying to force the Fabrication Division into a price break?**
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