General Instrumentation Corporation manufactures dashboard instruments for heavy construction equipment. The firm is based in Baltimore, but operates several divisions in the United States, Canada, and Europe. The Hudson Bay Division manufactures complex electrical panels that are used in a variety of the firm's instruments. There are two basic types of panels. The high-density panel (HDP) is capable of many functions and is used in the most sophisticated instruments, such as tachometers and pressure gauges. The low-density panel (LDP) is much simpler and is used in less complicated instruments. Although there are minor differences among the different high-density panels, the basic manufacturing process and production costs are the same. The high-density panels require considerably more skilled labor than the low-density panels, but the unskilled labor needs are about the same. Moreover, the direct materials in the high-density panel run substantially more than the cost of materials in the low-density panels. Production costs are summarized as follows: LDP HDP Unskilled labor (0.80 hour @ $8 $ 8 $10) Skilled labor: LDP (0.25 hour @ $20) HDP (1.00 hours @ $20) Raw material Purchased components 7 13 Variable overhead 8 Total variable cost $34 $66 The annual fixed overhead in the Hudson Bay Division is $140,000. There is a limited supply of skilled labor available in the area, and the division must constrain its production to 44,000 hours of skilled labor each year. This has been a troublesome problem for Jacqueline Ducharme, the division manager. Ducharme has successfully increased demand for the LDP line to the point where it is essentially unlimited. Each LDP sells for $42. Business also has increased in recent years for the HDP, and Ducharme estimates the division could now sell anywhere up to 7,000 units per year at a price of $126. On the other side of the Atlantic, General Instrumentation operates its Volkmar Tachometer Division in Berlin. A recent acquisition of General Instrumentation, the division was formerly a German company known as Volkmar Construction Instruments The division's main product is a sophisticated tachometer used in heavy-duty cranes, bulldozers, and backhoes. The instrument, designated as a TCH-320, has the following production costs. TCH-320 Unskilled labor (0.80 hour@ $ 9.60 $12) Skilled labor (3 hours @ $18) 54.00 Raw material 12.40 Purchased components 170.00 Variable overhead 14.00 Total variable cost $260.00 The cost of purchased components includes a $160 control pack currently imported from an Asian electronics company. Fixed overhead in the Volkmar Tachometer Division runs about $840,000 per year. Both skilled and unskilled labor are in abundant supply. The TCH-320 sells for $300. Bertram Mueller, the division manager of the Volkmar Tachometer Division, recently attended a high-level corporate meeting in Baltimore. In a conversation with Jacqueline Ducharme, it was apparent that Hudson Bay's high-density panel might be a viable substitute for the control pack currently imported from Asia and used in Volkmar's TCH- 320. Upon returning to Berlin, Mueller asked his chief engineer to look into the matter Hans Schmidt obtained several HDP units from Hudson Bay, and a minor R&D project was mounted to determine if the HDP could replace the imported control pack. Several weeks later, the following conversation occurred in Mueller's office Schmidt: There's no question that Hudson Bay's HDP unit will work in our TCH-320. In fact, it could save us some money. Mueller: That's good news. If we can buy our components within the company, we'll help Baltimore's bottom line without hurting ours. Also, it will look good to the brass at corporate if they see us working hard to integrate our division into General Instrumentation's overall production program. Schmidt:I've also been worried about the reliability of supply of the imported control pack. I don't like being dependent on such a critical supplier that way. Mueller: I agree. Let's look at your figures on the HDP replacement Schmidt:I got together with the controller's people, and we worked up some numbers. If we replace the imported control pack with the HDP from Canada, we'll avoid the $160 control pack cost we're now incurring. In addition, I figure we'll save $6.00 on the basic raw materials. There is one catch, though. The HDP will require some adjustments in order to use it in the TCH-320. We can make the adjustments here in Berlin. I'm guessing it will require an additional three hours of skilled labor to make the necessary modifications. I don't think variable overhead would be any different. Then there is the cost of transporting the HDPs to Berlin. Let's figure on $5.00 per unit. Mueller: Sounds good. I'll give Jacqueline Ducharme a call and talk this over. We can use up to 12,000 of the HDP units per year given the demand for the TCH-320. I wonder what kind of a transfer price Hudson Bay will want. 3. Assume that Hudson Bay agrees to transfer 12,000 HDP units per year to Volkmar using a transfer price equal to its current selling price of $126. If Volkmar is able to get Hudson Bay to agree to a lower transfer price, what effect will this have on General Instrumentation's income? General Instrumentation's income will