Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a varie

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Weller Industries is a decentralized organization with sixdivisions. The company’s Electrical Division produces a variety ofelectrical items, including an X52 electrical fitting. TheElectrical Division (which is operating at capacity) sells thisfitting to its regular customers for $7.50 each; the fitting has avariable manufacturing cost of $4.25.
The company’s Brake Division has asked the Electrical Divisionto supply it with a large quantity of X52 fittings for only $5each. The Brake Division, which is operating at 50% of capacity,will put the fitting into a brake unit that it will produce andsell to a large commercial airline manufacturer. The cost of thebrake unit being built by the Brake Division follows:
Purchased parts (from outside vendors) $22.50Electrical fitting X52 5.00Other variable costs 14.00Fixed overhead and administration  8.00Total cost per brake unit $49.50Although the $5 price for the X52 fitting represents a substantialdiscount from the regular $7.50 price, the manager of the BrakeDivision believes the price concession is necessary if his divisionis to get the contract for the airplane brake units. He has heard“through the grapevine” that the airplane manufacturer plans toreject his bid if it is more than $50 per brake unit. Thus, if theBrake Division is forced to pay the regular $7.50 price for the X52fitting, it will either not get the contract or it will suffer asubstantial loss at a time when it is already operating at only 50%of capacity. The manager of the Brake Division argues that theprice concession is imperative to the well-being of both hisdivision and the company as a whole.
Weller Industries uses return on investment (ROI) to measuredivisional performance.
Required:
1- What is the Electrical Division’s lowest acceptable transferprice? If you were the manager of the Electrical Division, wouldyou supply the X52 fitting to the Brake Division for $5 each asrequested? Why or why not?
2- Assuming the airplane brakes can be sold for $50, what is thefinancial advantage (disadvantage) for the company as a whole (on aper unit basis) if the Electrical Division supplies fittings to theBrake Division? Explain your answer.
3- What is the Brake Division’s highest acceptable transferprice? In principle, should it be possible for the two divisionalmanagers to agree to a transfer price in this particularsituation?
4- Discuss the organizational behavior problems, if any,inherent in this situation. What would you advise the company’spresident to do in this situation?