General

appliance

GROUP NAME
PARAG
P PAWAN
A ARSH
R- ROHIT
A- AMRINDER
G- GAGAN

General
study

Appliance

Corporation

case

The GAC was an integrated manufacturer of all

types of home appliances. The company had a
decentralized , divisional organization consisting
of four product divisions , four manufacturing
divisions, and six staff offices.
Each division and staff office was headed by a
vice president. The staff offices had functional
authority over their counterparts in the divisions,
but they had no direct line authority over the
divisional general managers

Organizational chart
Of
GAC

Finance
staff

Board of Directors

president

Engineering Manufacturing
Industrial
Purchasing Marketing
staff
staff
Relations staff
staff
staff

Group vice president

Manufacturing divisions
Chrome
Product
division
Gear
And
Transmission
division

Electric
Motor
division
Stamping
division

Group vice president

Product divisions
Electric
Stove
division
Refrigerating
division

Laundry
Equipment
division
Miscellaneous
Appliance
division

Transfer prices
The divisions were expected to deal with one another as
though they were in dependent companies. Parts were to be
transferred at prices arrived at by negotiation between the
divisions. These prices generally were based on the actual
prices paid to outside suppliers for the same or comparable
parts.
These outside prices were adjusted to reflect differences in
design of the outside part from that of the inside part. In
general, the divisions established prices by negotiation
among themselves, but if the divisions could not agree on a
price, they could submit the dispute to the finance staff for
arbitration

Source Determination

The divisions were instructed to deal with one another as

independent units.
Product division did not have power to decide whether to buy from
within the company or from outside.
The purchasing staff had the authority to settle disputes between the
product and manufacturing divisions.
In nearly every case of dispute the purchasing staff had decided that
part would continue to be manufactured within the company

Stove top problem

(quality problem)
The Chrome Products Division sold to the electric stove division a chrome plated unit that
fitted on the top of the stove.
Producing this unit since Jan 1, 1986; prior to that time it had been produced by outside
vendor.
About middle of 1986, the president of GAC became concerned over complaints from
customers and dealers about the quality of the companys products.
Accordingly early in 1987,he called in the manufacturing vice-president and told him to
bring the quality of all products to satisfactory level.

Total cost of added operations was 80 cents a unit.

Added copper-plating and buffing operations .
In July 87, chrome Products division proposed to increase price of the stove top by 90
cents.

The Electric Stove Division objected to proposed price increase.

Chrome Products Division:
I. Required by manufacturing staff to add operations at cost of 80
cents per unit.
II. Operations resulted in improved quality
III. Present price $10 was based on old quality standards.
Electric Stove Division:
IV. No change in engineering specifications.
V. Electric Stove Division had not requested that quality be improved
nor consulted.
VI. Improvement in quality from customer point of view was doubtful.
VII. Not worth 90 cents.
VIII.Cost of improved quality included in $ 10 price.
Finance staff review:

Finance staff reviewed the dispute. Engineering dept. of the

manufacturing staff was asked to review added operations and comment
on acceptability of the proposed increased cost.
Engineering dept. stated that the proposed costs were reasonable and
represented efficient processing.
The quality control stated that the quality was improved and new parts
were of superior quality to parts purchased from outside vendors.

Thermostatic control problem

Electric motor division produced thermostatic control units.

Laundry Equipment Division bought all its requirements for
thermostatic control units from Electric motor division .
Refrigeration division, until 1985 purchased from Monson Controls
Corporation . Later made source change changes as a result of
Electric motor division
requests in the best interests of the
company.
Prices of the Monson Controls Corporation had been as follows:
1984
1985
1986
1987(Jan-June)

$3.00
$2.70
$2.50
$2.40

Price reductions: profits of Electric motor division had dropped from

before tax 15% in 1984 to nearly zero in 1987.

Electric motor division

Based its refusal on the grounds:
Desperate effort of Monson Controls Corporation to continue supplying
GAC.
At the lower price it would lose money.
The price was distress price and not valid basis for determining internal
price.
Electric motor division would immediately make plans to close the
plant,if forced to accept the price of $2.15.
Laundry Equipment Division:
Based its case on the fact that products to be transferred between
divisions on competitive pricing.

Refrigeration division :
Based its case on the fact that the division could buy the
thermostatic control units from reliable outside supplier at $ 2.15.
Unjust to make it pay higher price .
Agreement made between EMD and RD that in the event of a
major pricing disparity, the further model requirements will be
sourced to the lowest bidder.
Finance staff review
The finance staff asked purchasing staff to review outside market
situation.
Staff replied there was excess capacity so prices were soft.
If all the corporations requirements were placed with outside
suppliers ; prices would rise to at least $ 2.40 ; excess capacity
would dry up.

Transmission problem
oThe Laundry Equipment Division produce automatic washers.
o Initially , it had purchased its transmission from two sources
- Thorndike Machining corporation and The Gear and
Transmission Division .
oAgreement with Thorndike Machining corporation from 1977
to 1987 to buy one half of its transmission.
oIn 1985, Thorndike Machining corporation notified that it
would not extend the agreement
oThorndike Machining corporation proposed schedule of price
reductions.
Present price
$14.00
Price effective 7/1/85
$13.50
Price effective 7/1/86
$13.00
Price effective 7/1/87
$12.50
Price effective 7/1/88
$12.00
oLow cost transmission at $ 10 would be available by Jan
1,1988

Transmission problem

In Oct 1985, Gear and Transmission Division submitted project

proposal to top mgt requesting money to build facilities.
Laundry Equipment Division refused to accept proposed price and
countered with an offer of $ 11.21.

The Gear and Transmission Division

Quotation of $ 10 invalid because it represented desperate effort
to keep share of transmission.
If the Laundry Equipment Division wished to object it should
have done so when project was presented to top management.
Finance staff review
The purchasing staff stated that ,the transmission could be
obtained from Thorndike Machining corporation at the quoted
price.

1. What , if any , change in the companys transfer price

policies and procedures would you recommend?