Question

Southern Glass manufactures glass bottles for a variety of products, including perfume bottles and liquor bottles. The company has two profit centers: production and labeling. The production department melts the raw materials, adding metal oxides to produce different colors if desired. It then uses a continuous rolling process to shape the bottles. Production then transfers the bottles to the labeling department at an average cost of $15 ($12 variable; $3 fixed) per case. The labeling department then paints or attaches labels on the bottles at an additional fixed cost of $1 and sells the labeled bottles on the external market at an average price of $30 per case.

Recently, a regional liquor manufacturer contacted the manager of the production department about purchasing ¼ of the 250,000 cases Southern Glass plans to make in April. The company would like production to start making their specially shaped bottles. They are willing to pay $28 per case. Making the special bottles would not affect the production department’s cost but it would require cutting current bottle production by ¼; therefore, the labeling department would only label and sell 187,500 labels in April.

(1) Will the production department prefer to sell all 250,000 cases internally or sell ¼ (62,500) cases to the liquor manufacturing and ¾ (187,500) to the labeling department?

(2) Will the labeling department prefer to purchase all 250,000 cases internally or allow production to sell ¼ (62,500) cases to the liquor manufacturing?

(3) Will company profits be maximized if the production department sells all 250,000 cases internally or sells ¼ (62,500) cases externally and ¾ (187,500) internally?

(4) Why is there a goal congruence problem (hint: does everyone want the same option)?

(5) Provide one specific policy change that can solve the goal congruence problem illustrated in this example (at a minimum, there are three changes – you only need to provide one). How does your policy change solve the problem?

HINT: Take one option at a time and consider each type of sales (if applicable) and costs.For example, for #1:

Transfer all bottles internally:

Sales (if applicable)

Variable costs

Fixed costs

Net Profit Sell

¼; Transfer ¾:

Sales (if applicable)

Variable costs

Fixed Costs

Net Profit

Repeat the process for #2 and #3 using the applicable sales and costs.

Answer 1