Champion Chemical Company has a number of divisions that produce and market paints, varnishes, and other chemical products. The company also has a small plant that manufactures metal containers for the divisions various products. The plant, which has substantial excess capacity, is organized as a cost center and transfers containers to the divisions at cost. Eduardo Sanchez, the container plant manager, has approached the corporate executive committee with the suggestion that the plant he administers be organized as a profit center. This would be accomplished by changing the transfer price to be equal to full cost plus a markup of 10 percent.
Required:
Comment on Eduardo's suggestion. Could his proposal lead to sub optimal decisions from the standpoint of the company as a whole?