PharoahIndustries is a diversified corporation with separate operating divisions. Each division's performance is evaluated based on its total dollar profits and return on division investment.

The WindAir division manufactures and sells air conditioners. The coming year's budgeted income statement, based on a sales volume of23,000units, is as follows:

WINDAIR DIVISION

Budgeted Income Statement

For the Fiscal Year

Per Unit

Total (in thousands)

Sales revenue

$1,080

$24,840

Manufacturing costs

Compressor

1894,347Other raw materials

1002,300Direct labour

811,863Variable overhead

1222,806Fixed overhead

861,978Total manufacturing costs

57813,294Gross margin

50211,546Operating expenses

Variable selling

491,127Fixed selling

511,173Fixed administration

1032,369Total operating expenses

2034,669Net income before taxes

$299$6,877

WindAir's 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 manager's request indicates that a5% reduction ($54) in the selling price would increase the sales volume by16%, or3,680units. 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 $189per compressor. The manager of WindAir has approached the manager ofPharoahIndustries' 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 division's raw materials cost by $4.05per 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 $70for each compressor unit.

The compressor division has the capacity to produce83,500units. The coming year's budgeted income statement for the compressor division, which follows, is based on a sales volume of72,500units without considering WindAir's proposal.

COMPRESSOR DIVISION

Budgeted Income Statement

For the Fiscal Year

Per Unit

Total (in thousands)

Sales revenue

$110

$7,975Manufacturing costs

Raw materials

161,160Direct labour

10725Variable overhead

141,015Fixed overhead

161,160Total manufacturing costs

564,060Gross margin

543,915Operating expenses

Variable selling

8580Fixed selling

6435Fixed administration

10725Total operating expenses

241,740Net income before taxes

$30$2,175

Calculate the following for WindAir.

Variable costs$

enter the variable costs per unit in dollars

per unit

Total fixed costs$

enter the total fixed costs in dollars

New selling price$

enter the new selling price in dollars

New sales volumeenter the new sales volume in units

unitsNet income$

enter the net income in dollars

Should WindAir make the5% price reduction on its air conditioners even if it cannot acquire the compressors internally for $70each?

select an option

Yes

No

Ignoring your answer to part (a), assume that WindAir needs26,680units. Calculate the following for the Compressor Division.(Round "Variable cost of current sales" answer to 0 decimal places, e.g. 85 and all other answers to 2 decimal places, e.g. 25.75.)

Variable cost$

enter the variable cost per unit in dollars rounded to 2 decimal places

per unitVariable cost of current sales$

enter the variable cost of current sales per unit in dollars rounded to 0 decimal places

per unitOpportunity cost$

enter the opportunity cost in dollars per unit rounded to 2 decimal places

per unitMinimum transfer price$

enter the minimum transfer price per unit in dollars rounded to 2 decimal places

per unit

Should the compressor division be willing to supply the compressor units for $70each?

Compressor division should

select an option

accept

reject

the offer to supply the compressor units for $70each.

Ignoring your answer to part (a), assume that WindAir needs26,680units. Calculate the advantage that the corporation and Wind Air would be making from the sales.

Corporate advantage from internal sales

$

enter the corporate advantage from internal sales in dollars

Would it be in the best interest ofPharoahIndustries for the compressor division to supply the compressor units at $70each to the WindAir division?

select an option

Yes

No