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 $16,000$ units.

AIR COMFORT DIVISION

Budgeted Income Statement

$($In thousands$)$

Per Unit Total

Sales revenue $ $406$ $ $6,496$

Manufacturing costs:

Compressor $ $73$ $ $1,168$

Other direct material $31496$

Direct labor $37592$

Variable overhead $26416$

Fixed overhead $30480$

Total manufacturing costs $ $197$ $ $3,152$

Gross margin $ $209$ $ $3,344$

Operating expenses:

Variable selling $ $19$ $ $304$

Fixed selling $25400$

Fixed administrative $37592$

Total operating expenses $ $81$ $ $1,296$

Net income before taxes $ $128$ $ $2,048$

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 increase sales volume $23$ percent, or $3,680$ 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 $$73$ per compressor. The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort. The Compressor Division currently manufactures and sells a unit to outside firms that is similar to the unit used by the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division$$s direct material cost by $$2\mathrm{.}50$ per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division. The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay $$49$ 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 $ $98$ $ $6,272$

Manufacturing costs:

Direct material $ $13$ $ $832$

Direct labor $9576$

Variable overhead $11704$

Fixed overhead $14896$

Total manufacturing costs $ $47$ $ $3,008$

Gross margin $ $51$ $ $3,264$

Operating expenses:

Variable selling $ $7$ $ $448$

Fixed selling $5320$

Fixed administrative $8512$

Total operating expenses $ $20$ $ $1,280$

Net income before taxes $ $31$ $ $1,984$

Required:

$1-$a$.$ Calculate the increase$/$decrease in net income before taxes for Continental Industries assuming the Air Comfort Division institutes the $5$ percent price reduction on its air$-$conditioner units even if it cannot acquire the compressors internally for $$49$ each.

$1-$b$.$ Should the Air Comfort Division institute the $5$ percent price reduction?

$2.$ Independently of your answer to Required $1-$a$,$ assume the Air Comfort Division needs $19,680$ units. Calculate the increase$/$decrease in net income before taxes for the Compressor Division if it supplies the $19,680$ compressor units for $$49$ each.

$3.$ Independently of your answer to Required $1-$a$,$ assume the Air Comfort Division needs $19,680$ units. Calculate the increase$/$decrease in net income before taxes for Continental Industries if the Compressor Division supplies the $19,680$ compressor units for $$49$ each.