The Pillercat Corporation is a highly decentralized company. Each division man- ager has full authority for sourcing decisions and selling decisions. The Machin- ing Division of Pillercat has been the major supplier of the 2,000 crankshafts that 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 price for the forthcoming year to $220 per unit (from $200 per unit in the current year). Juan Gomez, manager of the Machining Division, feels that the 10% price increase is fully 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 direct the Tractor Division to buy all its crankshafts from the Machining Division at the price of $220. The incremental costs per unit that Pillercat incurs to produce each crankshaft are the Machining Division's variable costs of $190. Fixed costs per crankshaft in the Machining Division are $20. Required 1. Compute the advantage or disadvantage (in terms of annual operating income) to the Pillercat Corporation as a whole if the Tractor Division buys crankshafts inter- nally from the Machining Division under each of the following cases.

a. The Machining Division has no alternative use for the facilities used to manu- facture crankshafts.

b. The Machining Division can use the facilities for other production operations, which will result in monthly 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 to order the Tractor Division to purchase all of its crankshafts from the Machining Division? Would your response differ according to the scenarios described in parts

a, b, and c of requirement 1? Why?

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Pillercat Machining Division Crankshafts Pillercat External Suppliers of Crankshafts External Market Tractor for Tractors Division