Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2432322 • Letter: D
Question
Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per circuit board Variable cost per circuit board $188 $125 Number of circuit boards: Produced during the year Sold to outside customers 21,600 15,700 5,900 Sold to Division B Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument) Division B incurred $270 in additional variable cost per instrument and then sold the instruments for $660 each. Required 1. Prepare income statements for Division A, Division B, and the company as a whole Division A Division B Total Company Sales Expenses Added by the division Transfer price paid Total expenses Net operating incomeExplanation / Answer
1) Income Statements for Division A, Division B and the Company as a whole(see working note)
Division A
Division B
Total Company
Sales
$4060800
$3894000
$6845600
Expenses
Added by the division
$2700000
$1593000
$ 4293000
Transfer price paid
$1109200
Total Expenses
$2700000
$2702200
$4293000
Net Operating Income
$1360800
$1191800
$2552600
Working Note:
Sales by division B=5900units*$ 660/unit=$ 3894000
Sales by company as a whole=(15700 units*188/unit+5900units*660/unit)=$6845600
2. Added by division A=21600units*$125/unit=$ 27,00,000
Added by division B=5900 units*$270/unit=$ 15,93,000
Added by company as a whole=$ 27,00,000+$1593000=$4293000
2) Suppose division B wants 6900 units and division A’s manufacturing capacity is 21600 units, then from the standpoint of the company it is better of division A sells the 1000 units to division B as the company gains by selling to division B to the extent of $ 202000.(see working note given below)
Working Note:
If the division A would sell to division B then from the company’s point of view the profits earned by the company as a whole on these 1000 units would be=($660-$270-$125)*1000units=$265000
If the division A would sell to the outside customers then from the company’s point of view the profits earned by the company as a whole on these 1000 units would be=($188-$125)*1000units=$63000
From the company’s point of view the additional gain byselling to division B rather than outsiders is=$26500-$63000=$202000.
Division A
Division B
Total Company
Sales
$4060800
$3894000
$6845600
Expenses
Added by the division
$2700000
$1593000
$ 4293000
Transfer price paid
$1109200
Total Expenses
$2700000
$2702200
$4293000
Net Operating Income
$1360800
$1191800
$2552600