Question

In: Accounting

InterGlobal Industries is a diversified corporation with separate operating divisions. Each division’s performance is evaluated on...

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 20,000 units.

AIR COMFORT DIVISION
Budgeted Income Statement
(In thousands)
Per Unit Total
Sales revenue $ 408 $ 8,160
Manufacturing costs:
Compressor $ 77 $ 1,540
Other direct material 37 740
Direct labor 31 620
Variable overhead 30 600
Fixed overhead 29 580
Total manufacturing costs $ 204 $ 4,080
Gross margin $ 204 $ 4,080
Operating expenses:
Variable selling $ 20 $ 400
Fixed selling 20 400
Fixed administrative 37 740
Total operating expenses $ 77 $ 1,540
Net income before taxes $ 127 $ 2,540


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 4 percent reduction in the selling price would increase sales volume 21 percent, or 4,200 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 $77 per compressor. The Air Comfort 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 $3.20 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the 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 $48 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
Sales revenue $ 92 $ 5,888
Manufacturing costs:
Direct material $ 12 $ 768
Direct labor 8 512
Variable overhead 10 640
Fixed overhead 13 832
Total manufacturing costs $ 43 $ 2,752
Gross margin $ 49 $ 3,136
Operating expenses:
Variable selling $ 6 $ 384
Fixed selling 4 256
Fixed administrative 7 448
Total operating expenses $ 17 $ 1,088
Net income before taxes $ 32 $ 2,048


Required:
1.
Calculate the increase/decrease in net income before taxes for Continental Industries assuming the Air Comfort Division institutes the 4 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $48 each.

Increase in net income before taxes of

2. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 24,200 units. Calculate the increase/decrease in net income before taxes for the Compressor Division if it supplies the 24,200 compressor units for $48 each.

Decrease in net income before taxes of

3. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 24,200 units. Calculate the increase/decrease in net income before taxes for Continental Industries if the Compressor Division supplies the 24,200 compressor units for $48 each.

Increase in net income before taxes of    $   

Solutions

Expert Solution

Required:
1. Calculate the increase/decrease in net income before taxes for Continental Industries assuming the Air Comfort Division institutes the 4 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $48 each.
AIR COMFORT DIVISION
Budgeted Income Statement
(In thousands) Before Price Reduction in 4% After Price Reduction in 4%
Per Unit Total Per Unit Total
Units 20 thousands 24.2 thousands
Sales revenue $                            408.00 $            8,160.00 $        391.68 $                                    9,478.66
Manufacturing costs:
Compressor $                              77.00 $            1,540.00 $          77.00 $                                    1,863.40
Other direct material $                              37.00 $               740.00 $          37.00 $                                       895.40
Direct labor $                              31.00 $               620.00 $          31.00 $                                       750.20
Variable overhead $                              30.00 $               600.00 $          30.00 $                                       726.00
Variable selling $                              20.00 $               400.00 $          20.00 $                                       484.00
Total variable  costs $                            195.00 $            3,900.00 $        195.00 $                                    4,719.00
Contribution margin $                            213.00 $            4,260.00 $        196.68 $                                    4,759.66
Increase in net income before tax $                  4,759,656.00
2. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 24,200 units. Calculate the increase/decrease in net income before taxes for the Compressor Division if it supplies the 24,200 compressor units for $48 each.
Outside
Sales
Air Comfort
Sales
Per Unit Per unit
Sales revenue $                              92.00 $                 48.00 Capacity calculation in units:
Manufacturing costs: Total capacity 75000
Direct material $                              12.00 $                   8.80 Sales to Air Comfort 24200
Direct labor $                                8.00 $                   8.00 Balance 50800
Variable overhead $                              10.00 $                 10.00 Projected sales to outsiders 64000
Variable selling $                                6.00 $                       -    Lost sales to outsiders . 13200
Total variable costs $                              36.00 $                 26.80
Contribution  margin $                              56.00 $                 21.20
Contribution from sales to Air Comfort ($21.20 x 24,200 units) $                     513,040.00
Loss in contribution from loss of sales to outsiders ($56  x 13,200 units) $                     739,200.00
Decrease in net income before taxes $                     226,160.00
Decrease in net income before taxes of $        226,160.00
3. Independently of your answer to Required 1-a, assume the Air Comfort Division needs 24,200 units. Calculate the increase/decrease in net income before taxes for Continental Industries if the Compressor Division supplies the 24,200 compressor units for $48 each.
Cost savings by using compressor unit from Compressor Division:
Compressor Division:
Outside purchase price $                              77.00
Compressor Divisions variable cost to produce $                              26.80
Savings per unit. $                              50.20
x Number of units 24200
Total cost savings $                  1,214,840.00
Compressor Divisions loss in contribution from loss of sales to outsiders $                     739,200.00
Increase in net income before taxes for InterGlobal Industries $                     475,640.00
Increase in net income before taxes of    $        475,640.00


Related Solutions

InterGlobal Industries is a diversified corporation with separate operating divisions. Each division’s performance is evaluated on...
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 units. AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Per Unit Total Sales revenue $ 400 $ 6,000 Manufacturing costs: Compressor $ 70 $ 1,050 Other direct material 37 555 Direct...
National Industries is a diversified corporation with separate operating divisions. Each divisions performance is evaluated based...
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....
Sarasota Corporation operates three divisions—Archer, Barrett, and Corvell. Division managers are evaluated based on the division’s...
Sarasota Corporation operates three divisions—Archer, Barrett, and Corvell. Division managers are evaluated based on the division’s return on investment, and historically, the Corvell division has consistently outperformed the other two divisions. Sarasota’s senior management team has recently discovered that the Corvell Division manager has chosen not to invest in projects that would have been beneficial to the organization as a whole, and they are concerned that the current practice of evaluating the division managers’ performance using return on investment may...
C. A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions....
C. A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions. The following presentation was made to Hickman's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below. Other Two Divisions Southern Division Total Sales $1,000,000 $300,000 $1,300,000 Variable Costs - 557,500 -234,000 - 791,500 Contribution 442,500 66,000 508,500 Margin Fixed Costs 192,500 86,000...
Transfer Pricing Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and...
Transfer Pricing Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows: Exoplex Industries Inc. Divisional Income Statements For the Year Ended December 31, 20Y8 Semiconductors Division Navigational Systems Division Total Sales: 2,240 units × $396 per unit $887,040 $887,040 3,675 units × $590 per unit $2,168,250 2,168,250 Total sales $887,040...
Transfer Pricing Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and...
Transfer Pricing Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows: Exoplex Industries Inc. Divisional Income Statements For the Year Ended December 31, 20Y8 Semiconductors  DivisionNavigational  Systems  DivisionTotalSales:        2,240 units × $396 per unit $887,040   $887,040        3,675 units × $590 per unit   $2,168,250 2,168,250           ...
Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems...
Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows: EXOPLEX INDUSTRIES INC. Divisional Income Statements For the Year Ended December 31, 2016 1 Semiconductors Division Navigational Systems Division Total 2 Sales: 3 2,240 units @ $396 per unit $887,040.00 $887,040.00 4 3,675 units @ $590 per unit $2,168,250.00 2,168,250.00...
Malibu Corporation is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the...
Malibu Corporation is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the Company’s Surf Division for last year are given below: Sales $21,000,000 Variable Expenses $13,400,000 Contribution Margin $ 7,600,000 Fixed Expenses $ 5,920,000 Net Operating Income $ 1,680,000 Divisional operating assets $ 5,250,000 The company had an overall ROI of 18% last year (considering all divisions)....
Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions:
  Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions: Case1234Alpha Division:    Capacity in units82,000402,000152,000302,000Number of units now being sold to outside customers82,000402,000102,000302,000Selling price per unit to outside customers$ 34$ 94$ 85$ 54Variable costs per unit$ 22$ 69$ 50$ 30Fixed costs per unit (based on capacity)$ 6$ 15$ 20$ 9Beta Division:    Number of units needed annually7,00032,00022,000120,400Purchase...
Silicon Industries is a decentralized company with two divisions: mining and processing. They are both evaluated...
Silicon Industries is a decentralized company with two divisions: mining and processing. They are both evaluated as profit centres. The mining division transfers raw diamonds to the processing division. The processing division is currently operating at 1 million kg below its capacity, while the mining division is operating at full capacity. The mining division can sell raw diamonds externally at $75 per kilogram. The unit cost of 1 kg of polished diamonds produced by the processing division is as follows:...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT