Reference no: EM132762743

The Farm Equipment Ltd, a manufacturer of components used for heavy farm equipment, is organised along decentralised product lines with each manufacturing division operating as a separate profit centre. Each manager has been delegated full authority on all decisions involving the sale of that division's output both to outsiders and to other divisions of Farm Equipment.
Two of these divisions are the Large Part Division and the Small Part Division.

• The Large Parts Division produces a tractor-engine component. To manufacture that part it requires a particular part no 303X which is manufactured by the Small Parts Division. In the past the Large Parts Division has purchased part 303X from the Small Parts Division for $14,000 per unit. However, the Large Parts Division manager decided to purchase a similar part from an external supplier for $13,500.

• The Small Parts Division manager is surprised with this decision as his division will not be able to utilise the freed-up capacity if they stopped supplying to the Large Parts Division.

• The Small Parts Division manager appeals to the top management of Farm Equipment for support but is told that because of the company's policy, top management cannot interfere in any decisions made by the division managers.

Additional data:

1. Large Parts Division's selling price of the tractor-engine component is $18,000. In addition to the cost of part 303X, it also incurs $1000 per unit of additional variable costs and $1000 per unit of fixed costs (allocated).
2. Small Parts Division's variable cost per unit to produce part 303X is $11,500. Small Parts Division's fixed cost (allocated) per unit is $2,500.

Required

Problem 1. Evaluate the top management's decision and provide a brief rationale for your assessment using the following criteria:

a) goal congruence;
b) evaluating division performance;
c) motivating management effort; and
d) preserving division autonomy.
Support your answer with appropriate calculations.

Problem 2. Should top management intervene? Why or why not. Briefly discuss.