The Pillercat Corporation is a highly decentralized company. Each division manager has full authority for sourcing decisions and selling decisions. The machining division of Pillercat has been the major supplier of the 2,000 crankshafts the tractor division needs each year. The tractor division, however, has just announced that it plans to purchase all its crankshafts in the forthcoming year from two external suppliers at $200 per crankshaft. The machining division of Pillercat recently increased its selling price for the forthcoming year to $220 per unit (from $200 per unit in the current year). Juan Gomez, manager of the machining division, views the 10% price increase as justified. It results from a higher depreciation charge on some new specialized equipment used to manufacture crankshafts and an increase in labor costs. Gomez wants the president of Pillercat Corporation to force the tractor division to buy all its crankshafts from the machining division at the price of $220. The following table summarizes the key data.

Required:

1. Compute the advantage or disadvantage of Juan Gomez’s proposal in terms of annual operating income to the Pillercat Corporation as a whole if the tractor division buys crankshafts internally from the machining division under each of the following cases:
a. The machining division has no alternative use for the facilities used to manufacture crankshafts.
b. The machining division can use the facilities for other production operations, which will result in annual cash operating savings of $29,000.
c. The machining division has no alternative use for its facilities, and the external supplier drops the price to $185 per crankshaft.

2. As the president of Pillercat, how would you respond to Juan Gomez’s request that you force the tractor division to purchase all of its crankshafts from the machining division? Would your response differ according to the three cases described in requirement 1? Explain.    

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Insert Page Layout A 1 Number of crankshafts purchased by tractor division 2 External supplier's market price per crankshaft 3 Variable cost per crankshaft in machining division 4 Fixed cost per crankshaft in machining division Home Formulas Data Review B 2,000 $200 $ 190 $ 20