Case 9.70 a-c 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 WindAir 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 1,050 Other raw materials 555 Direct labour 450 Variable overhead 675 Fixed overhead 480 Total manufacturing costs 3,210 Gross margin 2,790 Operating expenses Variable selling 270 Fixed selling 285 Fixed administration 570 Total operating expenses 1,125 Net income before taxes $1,665 WindAir's manager believes that sales can be increased if it reduces the unit selling price of the air conditioners. A market research study conducted by an independent firm at the manager's request indicates 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' compressor 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 specifications of the WindAir compressor are slightly different and would reduce the compressor division's raw materials cost by $1.50 per unit. In addition, 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 division, which follows, is based on a sales volume of 64,000 units without considering WindAir's proposal. COMPRESSOR DIVISION Budgeted Income Statement For the Fiscal Year Per Unit Total (in thousands) Sales revenue $100 $6,400 Manufacturing costs Raw materials 768 Direct labour 512 Variable overhead 640 Fixed overhead 704 Total manufacturing costs 2,624 Gross margin 3,776 Operating expenses Variable selling 384 Fixed selling Fixed administration 448 Total operating expenses 1,088 Net income before taxes $2,688 256 Calculate the following for WindAir. Variable costs 200 per unit Total fixed costs $ 1408000 New selling prices New sales volume units Net income Should WindAir make the 5% price reduction on its air conditioners even if it cannot acquire the compressors internally for $50 each? Ignoring your answer to part (a), assume that WindAir needs 17,400 units. Calculate the following. (Round variable cost, opportunity cost and minimum transfer price to 2 decimal places, e.g. 25.75.) Variable cost per unit Variable cost of current sales per unit Opportunity cost per unit Minimum transfer price per unit Should the compressor division be willing to supply the compressor units for $50 each? Compressor division should the offer to supply the compressor units for $50 each LINK TO TEXT Ignoring your answer to part (a), assume that WindAir needs 17,400 units. Calculate the advantage that the corporation and Wind Air would be making from the sales. Corporate advantage from internal sales 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
