Continental Industries is a diversified corporation with separate operating divisions. Each divisions performance is evaluated on the basis of profit and return on investment. The Air Comfort Division manufactures and sells air-conditioner units. The coming years budgeted income statement, which follows, is based upon a sales volume of 15,000 units.

AIR COMFORT DIVISIONBudgeted Income Statement(In thousands)

Total Per Unit

Sales revenue $12,000 $800

Manufacturing costs:

Compressor $2,100 $140

Other direct material 1,110 74

Direct labor 900 60

Variable overhead 1,350 90

Fixed overhead 960 64

Total manufacturing costs $6,420 $428

Gross margin $5,580 $372

Operating expenses:

Variable selling $540 $36

Fixed selling 570 38

Fixed administrative 1,140 76

Total operating expenses $2,250 $150

Net income before taxes $3,330 $222

Air Comforts 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 16 percent or 2,400 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 $140 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 Divisions direct material cost by $3 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 $100 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 Comforts proposal.

COMPRESSOR DIVISIONBudgeted Income Statement(In thousands)

TotalPer Unit

Sales revenue $12,800 $200

Manufacturing costs:

Direct material $1,536 $24

Direct labor 1,024 16

Variable overhead 1,280 20

Fixed overhead 1,408 22

Total manufacturing costs $5,248 $82

Gross margin $7,552 $118

Operating expenses:

Variable selling $768 $12

Fixed selling 512 8

Fixed administrative 896 14

Total operating expenses $2,176 $34

Net income before taxes $5,376 $84

1. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 17,400 units. Calculate the increase/decrease in net income before taxes for the Compressor Division if it supplies the 17,400 compressor units for $100 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.

Decrease in net income before taxes of $ _____________?

2. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 17,400 units. Calculate the increase/decrease in net income before taxes for Continental Industries if the Compressor Division supplies the 17,400 compressor units for $100 each. (Enter your answer in dollars and not in thousands.)

Increase in net income before taxes of $ _________________?