Question

InterGlobal Industries 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 unites. AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Per Unit $400 Total S6,000 S1,050 Sale revenue... Manufacturing costs: Compressor Other direct material Direct labor Variable overhead. Fixed overhead. S70 37 30 45 32 450 675 480 Total manufacturing costs Gross margin Operating expenses: $186 $2,790 Variable selling Fixed selling Fixed administrative S18 19 $270 285 570 S1.125 S1.665 Total operating expenses S75 STIT Net income before t 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 increases 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 Cofor 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 S1.50 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to 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. COMPRESSOR DIVISION Budgeted Income Statement (In thousands) Per Unit Total $6,400 S100 $12 10 S41 S59 S6 Sales revenue Manufacturing costs: Direct material Direct labor.... Variable overhead. Fixed overhead. $768 512 640 704 S2,624 Total manufacturing costs Gross margin Operating expenses: $384 256 448 $1,088 688 Variable selling. Fixed selling Fixed administrative Total operating expenses $42 Net income before taxes. Required: 1. Should the Air Comfort Division institute the 5 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $50 each? Support your conclusion with appropriate calculations. 2. Independently of your answer to requirement (I), assume the Air Comfort Division needs 17,400 units. Should the compressor Division be willing to supply the compressor units for $50 each? Support your conclusions with appropriate calculations. . Independently of your answer to requirement (1), assume Air Comfort needs 17.400 units. Suppose InterGlobal's top management has specified a transfer price of S50. Would it be in the best interest of InterGlobal Industries for the Compressor Division to supply the compressor units at $50 each to the Air Comfort Division? Support your conclusions with appropriate calculations. 4. Independently of your answer to requirement (I), suppose the Compressor Division is currently selling all of its production of 64,000 units at $100 each. Its capacity is 75,000 pairs. The Air Comfort Division has proposed a special order to purchase 20,000 units from the Compressor Division at $30 per pair. Will the Compressor Division manager be willing to accept this offer? Why and why not?

Answer 1

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