Question

National 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 year's budgeted income statement, based on a sales volume of 15,000 units, is as follows:

Windair division
Budgeted incomes statement
For the Fiscal Year
   Per Unit. Total (In thousands)

Sales revenue $400 $6,000
Manufacturing costs
Compressor 70 1,050
   Other raw materials 37. 555
   Direct Labour 30 450
   Variable overhead. 45. 675
   Fixed overhead 32. 480
   Total manufacturing costs 214 3,210
Gross margin 186. 2,790
Operatig expenses
Variable selling. 18. 270
   Fixed selling 19 285
Fixed administration 38 570
   Total operating expenses. 75 1,125
Net income before taxes $111 $1,665

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 independant firm at the managers request indicates that a 5% reduction ($20) in the selling price would increase the sales volume by 16%, or 2,400 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 70$ per compressor. the manager of WindAir has approached the manager of national 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 $1.50 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 the compressors it uses to come from one supplier and has offered to pay $50 for each compressor unit.

The compressor division has a capacity produce 75,000 units. The coming years budgeted income statement for the compressor division, which follows, is based on a sales volume of 64,000 units without considering WindAirs proposal.

Compressor division
budgeted income statement
for the fiscal year  

  per unit total(in thousands)
Sales revenue $100 $6,400
Manufacturing costs
Raw materials    12 768
Direct labour 8 512
Variable overhead 10 640
   Fixed overhead 11 704
   Total manufacturing costs 41 2,624
Gross margin 59 3,776
Operating expenses   
Variable selling 6 384
Fixed selling 4 256
   Fixed administration 7 448
Total operating expenses 17 1,088
   Net income before taxes $42 $2,688

a) Calculate the following for WindAir
Variable costs $________ per unit
Total fixed costs $________
New selling price $_______
New sales volume _______ units
Net income $_______
Should WindAir make 5% price reduction on its air conditioners even if it cannot acquire the compressors internally for $50 each?
YES/NO

Answer 1

A)
	Before 5%				After 5%
	Price Reduction				Price Reduction
	Per	Total		Per	Total	Total
	Unit	(in thousands)	Unit	(in thousands)	Difference
						(in thousands)
Sales revenue	$           400.00	$  6,000.00		$     380.00	$  6,612.00	$     612.00
Variable costs:
Compressor	$             70.00	$  1,050.00		$       70.00	$  1,218.00	$     168.00
Other direct material	$             37.00	$     555.00		$       37.00	$     643.80	$       88.80
Direct labor	$             30.00	$     450.00		$       30.00	$     522.00	$       72.00
Variable overhead	$             45.00	$     675.00		$       45.00	$     783.00	$     108.00
Variable selling	$             18.00	$     270.00		$       18.00	$     313.20	$       43.20
Total variable costs	$           200.00	$  3,000.00		$     200.00	$  3,480.00	$     480.00
Contribution margin	$           200.00	$  3,000.00		$     180.00	$  3,132.00	$     132.00
Summarized presentation:
Contribution margin of sales increase ($180 x 2,400)	432000
Loss in contribution margin on original volume arising from
decrease in selling price ($20  x 15,000)	300000
Increase in net income before taxes	132000
a) Calculate the following for WindAir
Variable costs $________ per unit	$           200.00
Total fixed costs $________	$ 1,335,000.00
New selling price $_______	$           380.00
New sales volume _______ units	$      17,400.00
Net income $_______	$    132,000.00
Should WindAir make 5% price reduction on its air conditioners even if it cannot acquire the compressors internally for $50 each?
YES