General Appliance Corporation Case Study

October 21th, 2016

Muhamad Zakky Alif
Class of International Program 31
Lecturer: Supriyadi, M.Sc., C.M.A., Ph.D.
Master of Business Administration,
Universitas Gadjah Mada

Case Summary
General Appliance Corporation is a manufacture of various kind of home appliance.
The company had a decentralization divisional organization consisting of four
product divisions, four manufacturing divisions, six staff offices, and each division or
staff office was and headed by a vice president.

Main Issue
The Chrome Product Division proposed to increase the price of the stove by 90
cents, 80 cents represented the cost of the added operations and 10 cents was the
profit markup on the costs. The Electric Stove Division does not agree about the
price increase. In July 1984, the demand for thermostatic control unit was high in
relation to industry production capacity. Several appliance companies including the
General Appliance Corporation, built or expanded their own facilities to produce this
unit. One of the result is declining price. The profit of the Electric Motor Vision on
the product has dropped from a before tax profit of 15% on its investment in 1984
to nearly zero in 1987. The Refrigeration Division proposed a price of $2.15 the
price paid to the Monson Controls Corporation. The Electric Motor Division refused to
reduce the prices below $2.40. The Laundry Division bought a transmission unit
from two sources, the internal Gear and the external Thorndike Machining
Corporation.

After

10

years

agreement

with

Thorndike,

General

Appliance

Corporation decided to not extend the contract and expand the facilities on the
Gear and Transmission Division to fulfill the needs of the Laundry Division.

Meanwhile, Thorndike proposed new lower price due to their improvement in

machine that increase their productivity. Gear and Transmission Division itself has
develop a lower cost and better performance transmission. Laundry division reject
to accept the price of $12 and propose $11.21 instead.

Problem Statement
1. Should the company produce the product inside the company? Or purchased
it from an outside vendors? (sourcing decision)
2. At what price should the product be transferred between product and
manufacturing division? (Transferred decision)

Analysis of Solution Alternatives

Q1: Should the company produce the product inside the company? Or purchased it
from an outside vendors? (Sourcing decision)
At the General Appliance Corporation, the purchasing staffs are the personnel that
decide which part would continue to be manufactured within the company. When
the part is decided to be manufactured internally, the manufacturing division must
hold the price at a level the product (purchaser) division could purchase it outside.
In this case this company should produce the part and sell the part to the product
division to maximize the total profit margin of company even though the cost of
internal division more expensive than outsider. The fundamental principle is that the
transfer price should be similar to the price that would be charged if the product
were sold to outside customers or purchase from outside vendors.

Q2: At what price should the product be transferred between product and
manufacturing division? (Transferred decision)
In arriving at the transfer price, companies typically eliminate advertising, financing
or other expenses that seller does not incur in internal transactions. If competitive
price are not available, transfer price may be set on the basis of cost plus a profit.
This company should calculate transfer price base on Cost-Based transferred pricing
with profit mark up for each business unit, so that the transfer pricing is competitive
to be bought.

Recommendation
1. The company should negotiate transfer price with each other business unit
and transfer price are not set by central staff group but from each division
manager. If each business units do not have the threat of doing business with
competitors as bargaining point in the negotiation process, headquarters staff
must develop a set of rules that govern both pricing and sourcing of
intracompany products.
2. In order to reduce budget, the company must set the priority to buy the
product or part from internal supplier.