Continental Industries is a diversified corporation with separate operating divi
ID: 2558033 • Letter: C
Question
Continental 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) Total Per Unit $8,380 $ 419 Sales revenue Manufacturing costs Compressor Other direct material Direct labor Variable overhead Fixed overhead $1,580 $ 79 36 37 37 26 720 740 740 520 Total manufacturing $4,300 $215 costs Gross margin $4,080 $204 Operating expenses Variable selling Fixed selling Fixed administrative $ 480 $ 24 24 37 480 740 Total operating $1,700 $ 85 expenses Net income before taxes $2,380 119 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 6 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 costsExplanation / Answer
Answer
Sales Price per unit
393.86
Less: Variable Cost
Compressor
79
Direct material
36
Labor
37
Variable overhead
37
Variable selling
24
TOTAL variable cost
213
New contribution per unit
180.86
Total additional Units sold
4200
Increase in Net Income
759612
INCREASE in Net Income before taxes of $759,612
YES, as the Net Income in increasing
COMPRESSION DIVISION
If Internally Transferred
If Sold Outside
Transfer Price
50
97
Less: Applicable Variale Cost
Direct material
9.6
13
Direct Labor
9
9
variable overhead
11
11
Variable selling
0
7
Total Variable Cost
29.6
40
Contribution per unit if units transferred at $50
20.4
57
Units transferred
24200
24200
Net Income from Internal Transfer
493680
1379400
DECREASE in Net Income before taxes of $885,720
[1379400 – 493680]
AIR COMFORT DIVISION
If Internally Transferred
If Purchased from Outside
Sales Price per unit
419
419
Less: Variable Cost
Compressor
50
79
Direct material
36
36
Labor
37
37
Variable overhead
37
37
Variable selling
24
24
TOTAL variable cost
184
213
New contribution per unit
235
206
Total additional Units sold
24200
24200
Total Contribution earned
5687000
4985200
For Air Comfort Division, Net Income will increase by $701,800 [5687000 - 4985200]
Hence, For Continental Industries
Decrease in Net Income [Compressor Division] = $885,720
Increase in Net Income [Air Comfort Division] = $701,800
Answer: DECREASE in Net Income before taxes of $183,920 [885720 – 701800]
Sales Price per unit
393.86
Less: Variable Cost
Compressor
79
Direct material
36
Labor
37
Variable overhead
37
Variable selling
24
TOTAL variable cost
213
New contribution per unit
180.86
Total additional Units sold
4200
Increase in Net Income
759612
INCREASE in Net Income before taxes of $759,612
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