WILL GIVE THUMBS UP

Oriole Industries 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 of 17,000 units, is as follows: WINDAIR DIVISION Budgeted Income Statement For the Fiscal Year Per Unit Total (in thousands) Sales revenue $600 $10,200 Manufacturing costs Compressor 105 1,785 Other raw materials 56 952 Direct labour 45 765 Variable overhead 68 1,156 Fixed overhead 48 816 Total manufacturing costs 322 5,474 Gross margin 278 4,726 Operating expenses Variable selling 27 459 Fixed selling 29 493 Fixed administration 57 969 Total operating expenses 113 1,921 Net income before taxes $165 $2,805 Wind Air'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 a 5% reduction ($30) in the selling price would increase the sales volume by 16%, or 2,720 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 $105 per compressor. The manager of WindAir has approached the manager of Oriole 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 division's raw materials cost by $2.25 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 $60 for each compressor unit. The compressor division has the capacity to produce 77,500 units. The coming year's budgeted income statement for the compressor division, which follows, is based on a sales volume of 66,500 units without considering WindAir's proposal. COMPRESSOR DIVISION Budgeted Income Statement For the Fiscal Year Per Unit Total (in thousands) Sales revenue $110 $7,315 Manufacturing costs Raw materials 12 798 Direct labour 10 665 Variable overhead 12 798 Fixed overhead 12 798 Total manufacturing costs 46 3,059 Gross margin 64 4,256 Gross margin 64 4.256 Operating expenses Variable selling 6 399 Fixed selling 4 266 Fixed administration 8 532 Total operating expenses 18 1,197 Net income before taxes $46 $3,059 Calculate the following for WindAir. Variable costs $ per unit Total fixed costs $ New selling price $ New sales volume units Calculate the following for WindAir. Variable costs $ per unit Total fixed costs $ New selling price $ New sales volume units Net income $ Should WindAir make the 5% price reduction on its air conditioners even if it cannot acquire the compressors internally for $60 each? Ignoring your answer to part (a), assume that WindAir needs 19,720 units. 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 $ per unit Variable cost of current sales $ per unit Opportunity cost $ per unit Minimum transfer price $ per unit Should the compressor division be willing to supply the compressor units for $60 each? Compressor division should v the offer to supply the compressor units for $60 each. Ignoring your answer to part (a), assume that WindAir needs 19,720 units. Calculate the advantage that the corporation and Wind Air would be making from the sales. Corporate advantage from internal sales $ Would it be in the best interest of Oriole Industries for the compressor division to supply the compressor units at $60 each to the WindAir division