=+Peter Wei, manager of the Machining Division, feels that the 10% price increase is justified. The need for the increase arises from a higher depreciation charge on some new specialised equipment used to manufacture crankshafts and an increase in labour costs. Peter wants the chief executive Chapter 19: Management control systems, transfer pricing and multinational considerations 745 M19_HORN3377_02_LT_C19.indd 745 2/09/13 4:05 PM officer of Pillercat Ltd to force the Tractor Division to buy all its crankshafts from the Machining Division at the price of $220. The following table summarises the key data:

1 2

3 4

A B Number of crankshafts purchased by Tractor Division 2000 External supplier’s market price per crankshaft Variable cost per crankshaft in Machining Division Fixed cost per crankshaft in Machining Division

$200

$190

$20 Required 1 Calculate the advantage or disadvantage in terms of annual operating profit to Pillercat Ltd as a whole if the Tractor Division buys crankshafts internally from the Machining Division under each of the following cases: