Abc Manufacturing Company

Topics: Cost, Costs, Variable cost Pages: 3 (827 words) Published: November 4, 2010
Dr. Clifford Brown


“If I were to price this crankshaft any lower than $225,” said Mike Brunner, manager of ABC Company’s Machining division, “I’d be countermanding my order of last month for our sales staff to stop shaving their bids and to bid full cost plus quotations. I’ve been trying for weeks to improve the quality of our business, and if I turn around now and accept this job at $195 or $200 or something less than $225, I’ll be tearing down this program I’ve been working so hard to build up. The division can’t very well show a profit by putting in bids which don’t even cover a fair share of overhead costs, let alone give us a profit.”

ABC Company was a medium-sized, partly integrated manufacturing company, producing lawn and garden equipment. Including the Machining, the company had four other divisions.

For several years each division had been usually judged independently on the basis of its profit and return on investment. Top management had been working hard to gain effective results from a policy of decentralizing responsibility and authority for all decisions except those relating to overall company policy. The company’s top officials believed that in the past few years the concept of decentralization had been successfully applied and the company’s profits and competitive position had definitely improved.

Early in 2010 the Tractor division, in conjunction with the Machining division, designed a crankshaft for one of its tractors. The Machining division’s staff spent several months helping to perfect the design, production methods, and materials to be used in the crankshaft. According to an agreement between the two divisions, the Machining division was reimbursed by the Tractor division for the cost of its design and development work.

When the specifications were all prepared, the Tractor division asked for bids on 2,000 crankshafts from the Machining division and from...
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