InterGlobal Industries is a diversified corporation with separate operating divisions. Each divisions performance is evaluated on the basis of profit and return on investment. The Air Comfort Division manufactures and sells air-conditioner units. The coming years budgeted income statement, which follows, is based upon a sales volume of 15,000 units. AIR COMFORT DIVISION Budgeted Income Statement Per Unit Total (in thousands) Sales revenue $ 400 $ 6,000 Manufacturing costs: Compressor $ 70 $ 1,050 Other direct material 37 555 Direct labor 30 450 Variable overhead 45 675 Fixed overhead 32 480 Total manufacturing costs $ 214 $ 3,210 Gross margin $ 186 $ 2,790 Operating expenses: Variable selling $ 18 $ 270 Fixed selling 19 285 Fixed administrative 38 570 Total operating expenses $ 75 $ 1,125 Net income before taxes $ 111 $ 1,665 Air Comforts 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 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 Comfort Division 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 the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Divisions 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 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 $50 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 Comforts proposal. COMPRESSOR DIVISION Budgeted Income Statement Per Unit Total (in thousands) Sales revenue $ 100 $ 6,400 Manufacturing costs: Direct material $ 12 $ 768 Direct labor 8 512 Variable overhead 10 640 Fixed overhead 11 704 Total manufacturing costs $ 41 $ 2,624 Gross margin $ 59 $ 3,776 Operating expenses: Variable selling $ 6 $ 384 Fixed selling 4 256 Fixed administrative 7 448 Total operating expenses $ 17 $ 1,088 Net income before taxes $ 42 $ 2,688

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 $50 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 17,400 units. Calculate the increase/decrease in net income before taxes for the Compressor Division if it supplies the 17,400 compressor units for $50 each.

3. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 17,400 units. Calculate the increase/decrease in net income before taxes for Continental Industries if the Compressor Division supplies the 17,400 compressor units for $50 each.