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 19,000 units. AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Per Unit Sales revenue $402 Total $7,638 Manufacturing costs: Compressor $ 72 $1,368 Other direct material 34 646 Direct labor 21 399 Variable overhead 36 684 Fixed overhead 30 570 Total manufacturing costs $193 $3,667 Gross margin $209 $3,971 Operating expenses: Variable selling $ 18 $ 342 Fixed selling Fixed administrative Net income before taxes 23 437 20 380 Total operating expenses $61 $148 $1,159 $2,812 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 6 percent reduction in the selling price would increase sales volume 21 percent, or 3,990 units. The division has sufficient production capacity to manage this increased volume with no increase in fixed costs. The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of $72 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 the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division's direct material cost by $3.30 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort 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 $46 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) Sales revenue Per Unit $96 Total $6,144 Manufacturing costs: Direct material $13 $ 832 Direct labor 9 576 Variable overhead 11 704 Fixed overhead 14 896 Total manufacturing costs $47 Gross margin $49 $3,008 $3,136 Operating expenses: Variable selling $ 7 $ 448 Fixed selling 5 320 Fixed administrative 8 512 Total operating expenses $20 $1,280 Net income before taxes $29 $1,856