ADVANCED MANAGEMENT ACCOUNTING

LESSON 22:
CASE STUDY

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 $200 per crankshaft. The Machining
Division of Pillercat recently increased its price for the forthcom-
ing 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 justified. It results from a higher depreda-
tion 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 cost per unit that Pillercat
incurs to produce each crankshaft is the Machining Division’s
variable cost of$190. The fixed cost per crankshaft in the
Machining Division is $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 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 crank shafts.
b. The Machining Division can use the facilities for other
production operations, which win 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 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 a, b, and c of requirement I? Explain company.
Notes

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