Question

Poudre Industries is a diversified manufacturing company with a decentralized
management structure. Each division is treated as a profit center. One of these
divisions is Wellington Processing, which produces a variety of products at a
single plant. Wellington operates below capacity. Wellington’s biggest customer
for a major product, XB42, is Eaton Industries, another division of Poudre. At the
normal production level of 30,000 units, XB42 costs $840 to produce: direct
materials, $310; direct labor, $80; overhead, $450). The composition of the
overhead cost is 60% fixed and 40% variable. The current selling price of XB42
is $1,120/unit. Eaton has been paying $1,075/unit, with the discount reflecting
lower transaction costs for Wellington. Eaton has found another supplier for
XB42 at a price of $690/unit. Wellington’s president refuses to meet this price, as
it is below cost, and she will lose money on the sale.
Required: As CEO of Poudre, discuss the factors to be considered in resolving
the pricing dispute between Wellington and Eaton.

Answer 1