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

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The compressor Division 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 Cost

Direct material $384,000$

Direct Labor $256,000$

Variable Overhead $320,000$

Fixed Overhead $352,000$

Total manufacturing cost $1,312,000$

Gross Margin $1,888,000$

Operating expense

Variable selling $192,000$

Fixed selling $128,000$

Fixed administrative $224,000$

Total operating expense $544,000$

Net Income $1,344,000$

a$.$ Calculate the net income for the appliance division assuming it institutes the $8\%$ price reduction on its refrigerator even if it cannot acquire the compressor internally for $$45/$unit $($Answers : $1,266,750)$

b$.$ Should the appliance division institute the $8\%$ price reduction on its refrigerator? Indicate and calculate the change in net income $($Answers$,$ net income increase by $18,000)$

c$.$ Calculate the Compressor Division$$s contribution margin per unit for selling to outside customers versus selling to the Appliance Division. $($Answers $64$ and $19)$

d$.$ Suppose the appliance division institutes the $8\%$ price reduction on its refrigerator, would the compressor division be willing to supply the compressors to the appliance divisions for $$45$ per unit? Indicate and calculate the change in net income $($Net income decreased by $95,500)$

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. $($Answers: net income increase b y $242,000)$