Continental industries is a diversified manufacturing

Reference no: EM13396917

Continental Industries is a diversified manufacturing company with a decentralized management structure. Each major division is treated as a profit center. One of the divisions is Westco, a chemical plant that produces a single product, P7. In recent years, the entire annual output of 400,000 tons of P7 has been sold to another division, Acme Chemical, which uses it as an ingredient in a variety of products. The transfer price is currently $2,100/ton. Variable cost to produce P7 is $600/ton. Westco's fixed costs are $540 million per year, resulting in a total cost of $1,950/ton. Of the fixed cost, 30% is depreciation on plant and equipment, and 25% is allocated corporate-level costs. Acme has found an outside supplier for P7 at a price of $1,550/ton. The president of Westco refuses to meet this price, as it is below cost. The president of Acme says she will purchase externally if Westco refuses to meet the market price. As CEO of Continental, discuss the factors that should be considered in resolving this dispute.

Reference no: EM13396917

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