After a competitive bidding process, Firm G wins a contract to collect and dispose of Firm H’s hazardous waste for $1,000 per year. Firm G’s labor costs are $200 per year, and because of the unique nature of the waste, it has to invest $8,000 in a special made-to-order furnace—money that it could otherwise have put in the bank at 10 % interest. Thus, the annualized cost of the investment is $800. So specialized is the furnace that, were the contract cancelled, Firm G could only scrap it and receive $1,500 for the metal.
1. By how much could Firm H threaten to cut the fee if subsequently some dispute arises over the terms of the contract, or if the contract comes up for renewal?
2. By how much could Firm H threaten to cut the fee if the furnace can be adjusted, at a cost of $3,000, to handle the waste of Firm J, which is willing to pay $700 per year for that service?