09-70 National Industries is a diversified corporation with separate operating divisions. Each division's performance is evaluated based on its total dollar profits and return on division investment. The Wind Air division manufactures and sells air conditioners. The coming year's budgeted income statement, based on a sales volume of 15,000 units, is as follows: WINDAIR DIVISION Budgeted Income Statement For the Fiscal Year Per Unit Total (in thousands) Sales revenue $400 $6,000 Manufacturing costs Compressor 70 1,050 Other raw materials 37 555 Direct labour 30 450 Variable overhead 45 675 Fixed overhead 32 480 Total manufacturing costs 214 3,210 Gross margin 186 2,790 Operating expenses Variable selling 18 270 Fixed selling 19 285 Fixed administration 38 570 Total operating expenses 75 1,125 Net income before taxes $111 $1,665 WindAir's manager believes that sales can be increased if it reduced the unit selling price of the air conditioners. A market research study conducted by an independent firm at the manager's request indi- cates that a 5% reduction ($20) in the selling price would increase the sales volume by 16%, or 2,400 units. WindAir has enough production capacity to manage this increased volume with no increase in fixed costs. Currently, WindAir uses a compressor in its units that it purchases from an outside supplier at a cost of $70 per compressor. The manager of WindAir has approached the manager of National Industries' com- pressor division about the sale of a compressor unit to WindAir. The compressor division currently manufactures and sells to outside firms a unit that is similar to the compressor used by WindAir. The specifica- tions of the WindAir compressor are slightly different and would reduce the compressor division's raw materials cost by $1.50 per unit. In addi- tion, the compressor division would not incur any variable selling costs for the units sold to WindAir. The manager of WindAir wants all of the compressors it uses to come from one supplier and has offered to pay $50 for each compressor unit. The compressor division has the capacity to produce 75,000 units. The coming year's budgeted income statement for the compressor divi- sion, which follows, is based on a sales volume of 64,000 units without considering WindAir's proposal. Cases 397 COMPRESSOR DIVISION Budgeted Income Statement For the Fiscal Year Per Unit Total (in thousands) Sales revenue $100 $6,400 Manufacturing costs Raw materials 12 768 Direct labour 8 512 Variable overhead 10 640 Fixed overhead 11 704 Total manufacturing costs 41 2,624 Gross margin 59 3,776 Operating expenses Variable selling 384 Fixed selling 4 256 Fixed administration 7 448 Total operating expenses 17 1,088 Net income before taxes $ 42 $2,688 .. ===> Instructions Answer the following questions: (a) Should WindAir make the 5% price reduction on its air condition- ers even if it cannot acquire the compressors internally for $50 each? Support your conclusion with appropriate calculations. (b) Ignoring your answer to part (a), assume that WindAir needs 17,400 units. Should the compressor division be willing to supply the compressor units for $50 each? Support your conclusions with ap- propriate calculations. (C) Ignoring your answer to part (a), assume that WindAir needs 17,400 units. Would it be in the best interest of National Industries for the compressor division to supply the compressor units at $50 each to the WindAir division? Support your conclusions with appropriate calculations. (adapted from CMA Canada, now CPA Canada)