Holley Carburetor, Inc. sells carburetors. Its cost accounting information is: S
ID: 2599354 • Letter: H
Question
Holley Carburetor, Inc. sells carburetors. Its cost accounting information is: Sales price $400; variable cost $150; and annual fixed costs are $400,000. Ford, Dodge, and Chevy are competitors of each other in the auto industry. Ford buys 800 carburetors at the normal price of $400. Dodge then buys another 800 carburetors at the normal price of $400 in the same year. Also in the same year, but after Ford and Dodge, Chevy buys 800 carburetors but at a price of $300. Ford and Dodge discover Chevy's reduced price and file suit against Holley under Section 2 of the Clayton Act for price discrimination. (Assume that all other elements for section 2 of the Clayton Act are met.) Holley's defense is:
a. Holley does not have a defense under these circumstances and is liable as alleged.
b. When Holley made the sale to Chevy, Holley had arrived at its breakeven point of 1000 units made and sold, and therefore could afford to sell to Chevy at a price as low as $300 and still breakeven.
c. When Holley made the sale to Chevy, Holley had arrived at its breakeven point of 1600 units made and sold, and therefore could afford to sell to Chevy at a price as low as $250 and still breakeven.
a. Holley does not have a defense under these circumstances and is liable as alleged.
b. When Holley made the sale to Chevy, Holley had arrived at its breakeven point of 1000 units made and sold, and therefore could afford to sell to Chevy at a price as low as $300 and still breakeven.
c. When Holley made the sale to Chevy, Holley had arrived at its breakeven point of 1600 units made and sold, and therefore could afford to sell to Chevy at a price as low as $250 and still breakeven.
d. When Holley made the sale to Chevy, Holley had arrived at its breakeven point of 1200 units made and sold, and therefore could afford to sell to Chevy at a price as low as $250 and still breakeven.Explanation / Answer
Solution:
Section 2 of Clayton Act: It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them: Provided, That nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered: Provided, however, That the Federal Trade Commission may, after due investigation and hearing to all interested parties, fix and establish quantity limits, and revise the same as it finds necessary, as to particular commodities or classes of commodities, where it finds that available purchasers in greater quantities are so few as to render differentials on account thereof unjustly discriminatory or promotive of monopoly in any line of commerce; and the foregoing shall then not be construed to permit differentials based on differences in quantities greater than those so fixed and established: And provided further, That nothing herein contained shall prevent persons engaged in selling goods, wares, or merchandise in commerce from selecting their own customers in bona fide transactions and not in restraint of trade: And provided further, That nothing herein contained shall prevent price changes from time to time where in response to changing conditions affecting the market for or the marketability of the goods concerned, such as but not limited to actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales in good faith in discontinuance of business in the goods concerned.
from above section we can say that Holley Carburetor may take defense of differnce in cost of manufacture for greater quantities and sales to chevy at a lessor price of $300.
Sales Price = $400 per unit, Variable Cost = $150 per unit
Contribution = $400 - $150 = $250 per unit
Fixed cost = $400,000
Breakeven Sales unit = $400,000 / 250 = 1600 units
Therefore Holley arrived brekeven point at sale of 1600 units to Ford & Dodge. Therefore Holley defense will be
c. When holley made the sale to chevy, holldy had arrived at its breakeven point of 1600 units made and sole, and therefore could afford to sell to Chevy at a price as low as $250 and still breakeven.
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