General appliance

GROUP NAME—

PARAG P – PAWAN A – ARSH R- ROHIT A- AMRINDER G- GAGAN

General Appliance Corporation case study

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

Board of Directors

president

Finance staff

Engineeringstaff

Manufacturingstaff

IndustrialRelations staff

Purchasingstaff

Marketing staff

Group vice presidentManufacturing divisions

Group vice presidentProduct divisions

Chrome Productdivision

GearAnd

Transmissiondivision

Stamping division

ElectricMotor division

ElectricStove

division

Laundry Equipment

division

MiscellaneousAppliancedivision

Refrigerating division

Organizational chart Of

GAC

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

Transfer prices

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

Source Determination

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 company’s 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.

Stove top problem (quality problem)

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 qualityIII. 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 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.

Finance staff review:

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 $3.001985 $2.701986 $2.501987(Jan-June) $2.40

Price reductions: profits of Electric motor division had dropped from before tax 15% in 1984 to nearly zero in 1987.

Thermostatic control problem

Laundry Equipment Division:Based its case on the fact that products to be transferred between divisions on competitive pricing.

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.

Electric motor division

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 reviewThe finance staff asked purchasing staff to review outside market situation.Staff replied there was excess capacity so prices were soft.If all the corporation’s 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 agreementoThorndike 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 company’s transfer price policies and procedures would you recommend?