8/18/2019 The Pillercat Corporation is a Highly Decentralized Company

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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!!! cran"shafts that the Tractor Division needs each year.

The Tractor Division ho#ever has just announced that it plans to purchase all its cran"shafts in the

forthcoming year from t#o e$ternal suppliers at %s 2!!! per cran"shaft. The Machining Division of 

Pillercat recently increased its selling price for the forthcoming year to %s 22!! per unit &from %s 2!!! per 

unit in the current year'.

(uan )omez manager of the Machining Division feels that the *!+ price increase is justified. ,t results

from a higher depreciation charge on some ne# specialized e-uipment used to manufacture cran"shafts and

an increase in labor costs. )omez #ants the president of Pillercat Corporation to force the Tractor Division

to buy all its cran"shafts from the Machining Division at the price of %s 22!!. The follo#ing table

summarizes the "ey data.

1. Compute the advantage or disadvantage in terms of annual operating income to the Pillercat

Corporation as a #hole if the Tractor Division buys cran"shafts internally from the Machining

division under each of the follo#ing cases

a. The Machining division has no alternative use for the facilities used to manufacture

cran"shafts.

b. The machining division can use the facilities for other production operations #hich #ill

result in annual cash operating savings of rs.2 /!!!!.c. The machining division has no alternative use for its facilities and the e$ternal supplier

drops the price to rs. *01! per cran" shaft.