I’m working on a business law case study and need an explanation and answer to help me learn.
The Hardy Company manufactures small electrical appliances, including electric shavers, electric
mixers, blenders, and irons for the home. The company had recently introduced a new line of
electric shavers for women. In the product design stage of the new product, the sales department
had conducted an extensive marketing research survey to determine exactly what style-color
combinations best suited the market for this new product. The style finally selected was an
extremely modish plastic case with an entirely new shape of cutting head.
Unfortunately, no commercially available fractional horsepower motor could be fitted
into the desired style of case. It was, therefore, necessary to have a supplier develop the required
The vice president of supply management of the Hardy Company, Mr. Monaghan,
discussed the problem with the sales representatives of several of Hardy’s best motor suppliers.
One of the persons contacted was the sales vice president of the Centennial Electric Company,
which had been one of Hardy’s suppliers for years and was known to have one of the best
developmental groups in the small motor field. In his conversation with Mr. Monaghan, the
Centennial Electric vice president expressed confidence that his firm could do the job, and he
even roughed out a proposed method of attacking the problem.
Mr. Monaghan and the engineering manager were so impressed by the approach of the
Centennial Company, as compared to presentations of the other companies contacted, that it was
decided to award the development work to Centennial. In setting up the contract for this
development work, it was discovered that the Centennial Electric Company had a rigid policy of
billing separately for developmental services only on government contracts. For all other work,
the Company recovered development costs through sale of the motors developed. Consequently,
the shaver motor was developed by Centennial on a “no charge” basis simultaneously with the
product design work at Hardy. Centennial was very cooperative and made several modifications
to the original design specifications. Finally, ten handmade motors of the final design passed
rigorous quality control checks by Hardy engineers. These motors were also provided on a “no
A purchase contract was then placed with Centennial Electric for the first production run
of 100,000 units. The price of the motors was slightly above the price of a standard motor of
equivalent horsepower ratings, but Mr. Monaghan felt that the differential was certainly not
enough for Centennial to recover the entire development cost over the run of 100,000. He knew
that Centennial had also made a sizable additional investment in special tools, dies, and fixtures
for this motor.
The shaver was a great success and another 100,000 units were produced in the first year.
Centennial had been given the order for these motors on a proprietary basis when it quoted a price
equal to the price of standard motors of the same horsepower rating. A blanket order of 150,000
units for the second year’s production was also awarded to Centennial without competitive bids.
When the contract for the third year’s production was being considered, sales
representatives of four different companies requested the right to bid on motors for the shaver.
One salesman was very indignant and said that his company had been discriminated against all
along and that he knew that his company could make a better motor for the job and sell it for less
than Centennial’s price. Although Mr. Monaghan felt that Centennial had done an excellent
development job and was providing good service on the contract, he wondered how long he
should allow Centennial to have this business on a proprietary basis. He was certain Centennial’s
price was not substantially out of line, but he was not at all certain that Centennial had recovered
all of its investment in development, tools, dies, and fixtures.
Do you feel that the buying of this motor was properly handled? How would you
have handled it?
Should the Hardy Company have solicited competitive bids on this item?
What would you do if you were in Mr. Monaghan’s position now?