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 20,000 units.

AIR COMFORT DIVISION

Budgeted Income Statement(In thousands)

Per Unit Total

Sales revenue $408 $8,160

Manufacturing costs:

Compressor $77 $1,540

Other direct material 37 740

Direct labor 31 620

Variable overhead 30 600

Fixed overhead 29 580

Total manufacturing costs$204 $4,080

Gross margin $204 $4,080

Operating expenses:

Variable selling $20 $400

Fixed selling 20 400

Fixed administrative 37 740

Total operating expenses $77 $1,540

Net income before taxes $127 $2,540

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 4 percent reduction in the selling price would increase sales volume 21 percent, or 4,200 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 $77 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 $3.20 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 $48 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

Sales revenue $92 $5,888

Manufacturing costs:

Direct material $12 $768

Direct labor 8 512

Variable overhead 10 640

Fixed overhead 13 832

Total manufacturing costs$43 $2,752

Gross margin $49 $3,136

Operating expenses:

Variable selling $6 $384

Fixed selling 4 256

Fixed administrative 7 448

Total operating expenses $17 $1,088

Net income before taxes $32 $2,048

Required:

1-a.Calculate the increase/decrease in net income before taxes for Continental Industries assuming the Air Comfort Division institutes the 4 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $48 each.

1-b.Should the Air Comfort Division institute the 4 percent price reduction?

2.Independently of your answer to Required 1-a, assume the Air Comfort Division needs 24,200 units. Calculate the increase/decrease in net income before taxes for the Compressor Division if it supplies the 24,200 compressor units for $48 each.

3.Independently of your answer to Required 1-a, assume the Air Comfort Division needs 24,200 units. Calculate the increase/decrease in net income before taxes for Continental Industries if the Compressor Division supplies the 24,200 compressor units for $48 each.