Fact Pattern:

National Industries is a diversified corporation with separate and distinct operating divisions. Each divisions performance is evaluated on the basis of total dollar profits and return on divisional investment.

The WindAir Division manufactures and sells air-conditioning units. The coming years budgeted income statement, based upon a sales volume of 15,000 units, appears below.

WindAir Division
Budgeted Income Statement
For the Next Fiscal Year
	Per	Total
	Unit	(000 omitted)
Sales revenue	$400	$6,000
Manufacturing costs
Compressor	$ 70	$1,050
Other materials	37	555
Direct labor	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 administrative	38	570
Total operating expenses	$ 75	$1,125
Net income before taxes	$111	$1,665

WindAirs division manager believes sales can be increased if the unit selling price of the air conditioners is reduced. A market research study conducted by an independent firm indicates that a 5% reduction in the selling price ($20) will increase sales volume by 16%, or 2,400 units. WindAir has sufficient production capacity to manage this increased volume with no increase in fixed costs.

WindAir currently uses a compressor in its units that it purchases from an outside supplier at a cost of $70 per compressor. The division manager of WindAir has approached the manager of the Compressor Division regarding the sale of a compressor unit to WindAir. The Compressor Division currently manufactures and sells a unit exclusively to outside firms that is similar to the unit used by WindAir. The specifications of the WindAir compressor are slightly different, which will reduce the Compressor Divisions materials costs by $1.50 per unit. In addition, the Compressor Division will 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 years budgeted income statement for the Compressor Division is shown below and is based upon a sales volume of 64,000 units without considering WindAirs proposal.

Compressor Division
Budgeted Income Statement
For the Next Fiscal Year
	Per	Total
	Unit	(000 omitted)
Sales revenue	$100	$6,400
Manufacturing costs
Materials	$ 12	$ 768
Direct labor	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	$ 6	$ 384
Fixed selling	4	256
Fixed administrative	7	448
Total operating expenses	$ 17	$1,088
Net income before taxes	$ 42	$2,688

Question

If National Industries requires the Compressor Division to sell 17,400 compressors to WindAir, how much is the effect on the corporations pretax earnings?

• A.$(409,600)

• B.$722,100

• C.$312,500

• D.$(215,400)