InterGlobal Industries InterGlobal Industries is a diversified corporation with separate operating divisions. Each division's performance is evaluated on the basis of profit and return on investment. The Air Comfort Division manufactures and sells air-conditioner units. The coming year's budgeted income statement, which follows, is based upon a sales volume of 15,000 unites. AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Total S6,000 S1,050 450 er Unit $400 Sale revenue... Manufacturing costs: Compressor S70 Direct labor 30 Variable overhead. 675 Fixed overhead. 32 $214 $186 Total manufacturing costs ross margn. S2,790 Operating expenses: Variable selling Fixed selling. S270 285 570 S1,125 $1,665 S18 Fixed administrative 38 S75 SIIT Total operating expenses Air Comfort's 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 increases 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 CoDivision uses a compressor in its units, which it purchases from an outside supplier at a cost of $70 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 that is similar to the unit used by theAir Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the compressor Division's direct material cost by $1.50 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to Air Comfor 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 S50 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 Comfort's proposal. COMPRESSOR DIVISION Budgeted Income Statement (In thousands) Per Unit Total 6.400 $100 S12 10 S41 Manufacturing costs: S768 512 640 704 $2.624 3,776 Variable overhead Total manufacturing costs S59 Gross margin.... Operating expenses S384 256 448 ,088 $6 Fixed seling... Fixed administrative S17 $42 2. Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the compressor Division be willing to supply the compressor units for S50 each? Support your conclusions with appropriate calculations 3. Independently of your answer to requirement (I), assume Air Comfort needs 17,400 units. Suppose InterGlobal's top management has specified a transfer price of $50. Would it be in the best interest of InterGlobal Industries for the Compressor Division to supply the compressor units at S50 each to the Air Comfort Division? Support your conclusions with appropriate calculations
