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 units. Total $ 6,000 30 AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Per Unit Sales revenue $400 Manufacturing costs: Compressor $ 70 Other direct material 37 Direct labor Variable overhead Fixed overhead 32 Total manufacturing costs $ 214 Gross margin $ 186 Operating expenses: Variable selling $ 18 Fixed selling Fixed administrative Total operating expenses $ 75 Net income before taxes $111 45 $1,050 555 450 675 480 $3,210 $ 2,790 19 38 $ 270 285 570 $1,125 $1,665 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 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 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 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 Comfort's proposal. Total $6,400 COMPRESSOR DIVISION Budgeted Income Statement (In thousands) Per Unit Sales revenue $100 Manufacturing costs: Direct material $ 12 Direct labor Variable overhead Fixed overhead Total manufacturing costs Gross margin Operating expenses: Variable selling $ 6 Fixed selling Fixed administrative Total operating expenses Net income before taxes $ 42 $ 768 512 640 704 $ 2,624 $3,776 $ 384 256 448 $ 1,088 $ 2,688 $ 17 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req3 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. (Round intermediate calculations to 2 decimal places and your final answer to the nearest whole dollar amount. Enter your answer in dollars and not in thousands.) Show less Increase in net income before taxes of Req1A Req 1B > 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Reg 2 Req3 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. (Round intermediate calculations to 2 decimal places and your final answer to the nearest whole dollar amount. Enter your answer in dollars and not in thousands.) Show less Decrease in net income before taxes of 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req 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. (Round intermediate calculations to 2 decimal places and your final answer to the nearest whole dollar amount. Enter your answer in dollars and not in thousands.) Show less A Increase in net income before taxes of
