"If I were to price these boxes any lower than $480 a gross," said James Brunner, manager of Snow White Paper Company's Thompson Division, "I'd be countermanding my order of last month for our sales force to stop shaving their bids and to bid full cost quotations. I've been trying for weeks to improve the quality of our business. If I turn around now and accept this job at $430 or anything less than $480, I'll be tearing down this program I've been working so hard to build up. The division can't show a profit by putting in bids that don't even cover a fair share of overhead costs, let alone give us a profit." Snow White Paper Company was a medium-sized, vertically integrated paper company, producing white …show more content…
The outside liner would be supplied by the Southern Division at a price equivalent to $90 per gross of boxes, and would be printed for $30 a gross by the Thompson Division. Of the $30, about $25 would be out-of-pocket costs.
Since this situation appeared to be a little unusual, William Kenton, manager of the Northern Division, discussed the wide discrepancy of bids with Snow White's marketing vice president. He told the marketing vice president, "We sell in a very competitive market, where higher costs cannot be passed on. How can we be expected to show a decent profit and return on investment if we have to buy our supplies at more than 10 percent over the going market?"
Knowing that Brunner had on occasion in the past few months been unable to operate the Thompson Division at capacity, the marketing vice president thought it odd that Brunner would add the full 20 percent overhead and profit charge to his out-of-pocket costs. When asked about this over the telephone, Brunner's answer was the statement that appears at the beginning of this case. Brunner went on to say that having done the design and developmental work on the box at only out-of-pocket cost, he felt entitled to a normal markup on the production of the box itself.
The vice president thought about the cost structures of the various divisions. He