Antonio Company uses the decentralized form of organizational structure and considers each of its divisions as an investment centre. Division L is currently selling 15,000 air filters annually, although it has sufficient productive capacity to produce 21,000 units per year. Variable manufacturing costs amount to $17 per unit, while the total fixed costs amount to $90,000. These 15,000 air filters are sold to outside customers at $37 per unit. 

Division M, also part of the Antonio Company, has indicated that it would like to buy 1,500 air filters from Division L, but at a price of $36 per unit. This is the price that Division M is currently paying an outside supplier. 

1. Compute the effect on the operating income of the company as a whole if Division M purchases 1,500 air filters from Division L. 

2. What is the minimum price that Division L should be willing to accept for the air filters? 

3. What is the maximum price that Division M should be willing to pay for the air filters? 

4. Suppose instead that Division L is currently producing and selling 21,000 air filters annually to outside customers. What is the effect on the overall Antonio Company operating income if Division L is required by top management to sell 1,500 air filters to Division M at (a) $18 per unit and (b) $37 per unit? 

5. For this question only, assume that Division L is currently earning an annual operating income of $36,000, and the division’s average invested capital is $300,000. The division manager has an opportunity to invest in a proposal that will require an additional investment of $20,000 and will increase annual operating income by $2,200. (a) Should the division manager accept this proposal if the Antonio Company uses ROI in evaluating the performance of its divisional managers? (b) If the company uses residual income? (Assume an “imputed interest” charge of 9 percent.)