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2000 crankshaft Case 1 The ABC Corporation is a highly decentralized company. Each division manager has full authority for sourcing decisions and selling decisions. The machining division of ABC has been the major supplier of the 2,000 crankshafts 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 ABC recently increased its selling price for the forthcoming year to $220 per unit (from $200 per unit in the current year). Omran, 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 labour costs. Omran wants the president of ABC Corporation to force the tractor division to buy all its crankshafts from the machining division at the price of $220. The following table summarizes the key data. whole company Required 1. Compute the advantage or disadvantage in terms of annual operating income to the ABC 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 $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 ABC, how would you respond to Omran's request that you force the tractor division to purchase all of its crankshafts from the machining division? Would your response differ according to the three cases described in requirement 1 ? Explain

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