Case 13-52 Interdivisional Transfers; Pricing the Final Product (LO 13-6, 13-7, 13-8) Continental Industries is a diversified corporation with separate operating divisions. Each division's performance is evaluated on the basis of profit and return on Investment. The Air Comfort Division manufactures and sells alr- conditioner units. The coming year's budgeted Income statement, which follows, is based upon a sales volume of 18,000 units. AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Total $7,380 Per Unit $410 Sales revenue $ 1.422 558 504 486 468 $ 79 31 28 27 26 Manufacturing costs: Compressor Other direct material Direct labor Variable overhead Fixed overhead Total manufacturing costs Gross margin Operating expenses: Variable selling Fixed selling Fixed administrative $3,438 $ 191 $3.942 $219 $ 360 378 522 $ 20 21 29 Total operating expenses $1,260 $ 70 Net Income before taxes $2.682 $149 Air Comfort's division manager believes sales can be increased if the price of the air-conditioners Is reduced. A market research study by an independent firm Indicates that a 5 percent reduction in the selling price would increase sales volume 22 percent , or 3,960 units. The division has sufficient production capacity to manage this Increased volume with no Increase in fixed costs. The Air Comfort Division uses a compressor In Its units, which it purchases from an outside supplier at a cost of $79 per compressor. The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort. The Compressor Division currently manufactures and sells a unit to outside firms which is similar to the unit used by the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division's direct material cost by $3.40 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division. The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay $47 for each compressor unit The Compressor Division has the capacity to produce 75.000 units. Its budgeted Income statement for the coming year, which follows, is based on a sales volume of 64.000 units without considering Air Comfort's proposal. COMPRESSOR DIVISION Budgeted Income Statement (In thousands) Total $5.888 Per Unit $92 Sales revenue Manufacturing costs: Direct material Direct labor Variable overhead Fixed overhead Total manufacturing costs $ 768 512 640 832 $ 12 8 10 13 $2,752 $43 Gross margin $ 3,136 $49 Operating expenses: Variable selling Fixed selling Fixed administrative $ 384 256 448 $ 6 4 7 Total operating expenses $ 1.088 $ 17 Net Income before taxes $2,048 $32 Required: 1-a. Calculate the increase/decrease in net Income before taxes for Continental Industries assuming the Air Comfort Division Institutes the 5 percent price reduction on Its alr-conditioner units even if it cannot acquire the compressors Internally for $47 each. (Round Intermediate calculations to 2 decimal places and your final answer to the nearest whole dollar amount. Enter your answer in dollars and not in thousands.) in net income before taxes of 1-b. Should the Air Comfort Division Institute the 5 percent price reduction? No Yes 2 Independently of your answer to Required 1-a, assume the Air Comfort Division needs 21,960 units. Calculate the increase/decrease in net Income before taxes for the Compressor Division If It supplies the 21,960 compressor units for $47 each. (Round Intermediate calculations to 2 decimal places and your final answer to the nearest whole dollar amount. Enter your answer in dollars and not in thousands.) in net income before taxes of 3. Independently of your answer to Required 1-3. assume the Air Comfort Division needs 21,960 units units. Calculate the increase/decrease in net income before taxes for Continental Industries if the Compressor Diision supplies the 21,960 compressor units for $47 each. (Enter your answer in dollars and not in thousands.) in net income before taxes of
