The Pillercat Corporation

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 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 Rs 2,000 per crankshaft. The Machining Division of
Pillercat recently increased its selling price for the forthcoming year to Rs 2,200 per unit (from Rs 2,000 per
unit in the current year).
Juan Gomez, manager of the Machining Division, feels that the 10% price increase is 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 Rs 2,200. The following table
summarizes the key data.

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 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 rs.2, 90,000.
c. The machining division has no alternative use for its facilities and the external supplier
drops the price to rs. 1,850 per crank shaft.