Question: a) What is Wind air's current contribution margin on air conditioners?

b) What is the effect on WindAir's net income if it acquires the compressors from outside source and reduce the price by 5%?

National Industries is a diversified corporationWindAir currently uses a compressor in its with separate and distinct operating divisions. units that it purchases from an outside Each division's performance is evaluated on supplier at a cost of $70 per compressor the basis of total dollar profits and return on divisional investment. The division manager of WindAir has approached the manager of the Compressor Division regarding the sale of a compressor unit to WindAir. The The WindAir Division manufactures and sells air-conditioning units. The coming year's budgeted income statement, based upon a sales volume of 15,000 units, appears below. Compressor Division currently manufactures and sells a unit exclusively to outside firms that is similar to the unit used by WindAir. The specifications of the WindAir compressor are slightly different, which will reduce the Compressor Division's raw materials costs by $1.50 WindAir Division Budgeted Income Statement For the Next Fiscal Year per unit. In addition, the Compressor Per Unit Total (000 omitted) Division will not incur any variable selling costs for the units sold to WindAir. The manager of WindAir wants all of the Sales revenue 400 S6000 compressors it uses to come from one supplier and has offered to pay $50 for Manufacturing costs Compressor Other raw materials each compressor unit. $ 70 $1,050 555 450 675 480 37 30 The Compressor Division has the capacity toproduce 75,000 units. The coming year's budgeted income statement for the Compressor Division is shown below and is based upon a sales volume of 64,000 units Direct labor Variable overhead Fixed overhead Total manufacturing costs $214 $3,210 without considering WindAir's proposal Gross margin Operating expenses Variable selling $186 $2,790 Compressor Division Budgeted Income Statement For the Next Fiscal Year $18$ 270 285 570 $ 75 $1,125 $111 $1,665 Fixed selling Per Total Fixed administrative Total operating expenses Net income before taxes omitted) Sales revenue Manufacturing costs $100 $6,400 WindAir's division manager believes sales can be increased if the unit selling price of the air conditioners is reduced. A market research study conducted by an independent firm indicates that a 5% reduction in the selling price ($20) will increase sales volume by 16%, or 2,400 units. WindAir has sufficient production capacity to manage this increased volume with no increase in fixed costs Raw materials Direct labor Variable overhead Fixed overhead $12$ 768 640 704 $2,624 $3,776 Total manufacturing costs $ 41 Gross margin Operating expenses $ 59 Variable selling Fixed selling Fixed administrative $ 6 $ 384 256 448 4 7 Total operating expenses $17 Net income before taxes $42 $1,088 $2,688