Gigida Company is a diversified corporation with separate operating divisions. Each division$$s

performance is evaluated on the basis of profit and return on investment. The Appliance

Division manufactures and sells refrigerator. The coming year$$s budgeted income statement

below is based upon a sales volume of $11,250$ units. Ignore tax.

Sales revenue $$4,500,000$

Manufacturing costs:

Compressor $$787,500$

Other direct material $$416,250$

Direct labor $$337,500$

Variable overhead $$506,250$

Fixed overhead $$360,000$

Total manufacturing costs $$2,407,500$

Gross margin $$2,092,500$

Operating expenses:

Variable selling $$202,500$

Fixed selling $$213,750$

Fixed administrative $$427,500$

Total operating expenses $$843,750$

Net income $$1,248,750$

The Appliance Division$$s manager believes sales can be increased if the price of the

refrigerator is reduced. A market research study by an independent firm indicates that $8$ percent

reduction in the selling price would increase sales volume by $20$ percent. The Appliance

Division has sufficient production capacity to manage this increased volume with no increase

in fixed costs.

Currently, the Appliance Division uses a compressor which it purchases from an outside

supplier. The Appliance Division has asked the Compressor Division about selling compressor

to the Appliance Division. The Compressor Division manufactures and sells to outside firms

a compressor that is similar to the compressor used by the Appliance Division. The

specification of the Appliance Division$$s compressor is slightly different, which would reduce

the Compressor Division$$s direct material cost by $$4\mathrm{.}00$ per unit. In addition, the Compressor

Division would not incur any variable selling costs in the units sold to the Appliance Division.

The manager of the Appliance Division wants all the compressors it uses to come from one

supplier and has offered to pay $$45$ for each compressor unit.

The Compressor Division has the capacity to produce $40,000$ units. Its budgeted income

statement for the coming year below is based on a sales volume of $32,000$ units without

considering Appliance Division$$s proposal. Ignore tax.

Sales revenue $$3,200,000$

Manufacturing costs:

Direct material $$384,000$

Direct labor $$256,000$

Variable overhead $$320,000$

Fixed overhead $$352,000$

Total manufacturing costs $$1,312,000$

Gross margin $$1,888,000$

Operating expenses:

Variable selling $$192,000$

Fixed selling $$128,000$

Fixed administrative $$224,000$

Total operating expenses $$544,000$

Net income $$1,344,000$

Suppose the Appliance Division institutes the $8$ percent price reduction on its refrigerator,

would the Compressor Division be willing to supply the compressors to the Appliance

Division for $$45$ per unit? Indicate and calculate the change in net income.

Yes, its net income increased by

No$,$ its net income decreased by

e$.$ Suppose the Appliance Division institutes the $8$ percent price reduction on its refrigerator

and Gigida Company$$s top management has specified a transfer price of $$45,$ would it be

in the best interest of Gigida Company for the Compressor Division to supply the

compressors to the Appliance Division? Indicate and calculate the change in net income.

Yes, its net income increased by

No$,$ its net income decreased by

Show detailed working for all questions