Pharoah Industries is a diversified corporation with separate operating divisions. Each divisions performance is evaluated based on its total dollar profits and return on division investment. The WindAir division manufactures and sells air conditioners. The coming years budgeted income statement, based on a sales volume of 18,000 units, is as follows:

WINDAIR DIVISION Budgeted Income Statement For the Fiscal Year
		Per Unit		Total (in thousands)
Sales revenue		$640			$11,520
Manufacturing costs
Compressor		112			2,016
Other raw materials		59			1,062
Direct labour		48			864
Variable overhead		72			1,296
Fixed overhead		51			918
Total manufacturing costs		342			6,156
Gross margin		298			5,364
Operating expenses
Variable selling		29			522
Fixed selling		30			540
Fixed administration		61			1,098
Total operating expenses		120			2,160
Net income before taxes		$178			$3,204

WindAirs manager believes that sales can be increased if it reduces the unit selling price of the air conditioners. A market research study conducted by an independent firm at the managers request indicates that a 5% reduction ($32) in the selling price would increase the sales volume by 16%, or 2,880 units. WindAir has enough production capacity to manage this increased volume with no increase in fixed costs. Currently, WindAir uses a compressor in its units that it purchases from an outside supplier at a cost of $112 per compressor. The manager of WindAir has approached the manager of Pharoah Industries compressor division about the sale of a compressor unit to WindAir. The compressor division currently manufactures and sells to outside firms a unit that is similar to the compressor used by WindAir. The specifications of the WindAir compressor are slightly different and would reduce the compressor divisions raw materials cost by $2.40 per unit. In addition, the compressor division would not incur any variable selling costs for the units sold to WindAir. The manager of WindAir wants all of the compressors it uses to come from one supplier and has offered to pay $58 for each compressor unit. The compressor division has the capacity to produce 78,000 units. The coming years budgeted income statement for the compressor division, which follows, is based on a sales volume of 67,000 units without considering WindAirs proposal.

COMPRESSOR DIVISION Budgeted Income Statement For the Fiscal Year
		Per Unit		Total (in thousands)
Sales revenue		$100			$6,700
Manufacturing costs
Raw materials		14			938
Direct labour		10			670
Variable overhead		12			804
Fixed overhead		13			871
Total manufacturing costs		49			3,283
Gross margin		51			3,417
Operating expenses
Variable selling		7			469
Fixed selling		5			335
Fixed administration		8			536
Total operating expenses		20			1,340
Net income before taxes		$31			$2,077