STIE STAN INDONESIA MANDIRI

Strategic Managerial Accounting

Ujian Akhir Semester Januari 2021
Dr. Ivan A. Setiawan
Kelas Karyawan A

The Pillercat Corporation

Pillercat Corporation is a highly decentralized company. Each division head has full
authority for sourcing decisions and sales decisions. The Tractor Division can purchase a
key component - the crankshaft - from the Machining Division of Pillercat or from external
suppliers:

Pillercat
Machining Division

Crankshafts

External Pillercat External Market

Suppliers of Tractor Division for Tractors
Crankshafts
The Machining Division of Pillercat has been the major supplier of crankshafts to the
Tractor division in recent years. The Tractor division, however, has just announced that it
will purchase all its crankshaft in the forthcoming year from two external suppliers at $200
per crankshaft. The Machining Division of Pillercat recently increased its unit price for the
forthcoming year to $220 (from $200 in the current year).
Juan Gomez, manager of the Machining Division, felt that the price increase was fully
justified. The Machining Division recently purchased some specialized equipment to
manufacture crankshaft. The resulting higher depreciation charge as well as an increase
in labor cost to the 10% price increase. Gomez met with the president of Pillercat
Corporation and requested that the Tractor Division be directed to buy all its crankshaft
from the Machining Division at the $220 price. Gomez supplied the following cost
information for the Machining Division: variable cost per crankshaft $190; fixed cost per
crankshaft $20. The Tractor Division purchase 2,000 crankshaft per month.
Compute the price under each of the following three cases:
1. Machining Division has no alternative use for the facilities used to manufacture
crankshafts (proposed price per unit vs. price from external suppliers only).
2. Machining Division can buy from external suppliers for $200 per crankshaft and use
the facilities for other production operations, which will result in monthly cash-
operating savings of $29,000.
3. Machining Division has no alternative use for facilities, and the external supplier drops
it price to $185 per crankshaft.
4. As the president of Pillercat, how would you respond to Juan Gomes’s request to direct
the Tractor Division to purchase all of its crankshafts from the Machining Division?
Would your response differ according to the scenarios describe in (1), (2), and (3)?

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