In: Accounting
Athos and Porthos are divisions of Dumas, Inc., operating as profit centers. Both are profitable. One of the products produced by Athos is A62, which normally sells for $180/unit. Cost is $125/unit (40% variable). Porthos is planning a new product, and is taking bids on one of the subassemblies. A62 would be appropriate for this subassembly with some modification.
a) Discuss the factors Athos should consider when submitting a bid.
b) If Athos does not submit the low bid, might Porthos still benefit from accepting their bid? Discuss briefly.
Selling Price of A62 equals to $180 per unit. The unit cost price of producing A62 is $125 out of which 40% is variable component i.e. $75 is fixed costs per unit and $50 is variable costs per unit.
(a) Major factors should be considered when submitting a bid for new product launch by Porthos.
(b) Porthos will still be benefited from accepting the bid if Athos submit the high bid because of synergies between Athos and Porthos as they both are divisions of same organization Dumas Inc. These both division can take advantage of the cross-functioning teams and structure in the organization. As 60% of the total cost of producing the A62 product in the Athos division are fixed costs, Porthos will get benefit as they won't have to invest in machinery and other assets to produce a new product if they accept high bid of Athos. Porthos need to focus on variable costs involved in producing the new product.
Porthos will also get benefited from the domain knowledge of employees working in Athos as the new product can be produced by A62 product with some modification. Moreover it is better to accept bid from internal division of the company due to domain knowledge and synergies between both the division for long term success of new product.