Division A manufactures electronic circuit boards. The boards can be sold either

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: 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 $200 in additional variable cost per instrument and then sold the instruments for $680 each. Prepare income statements for Division A, Division B, and the company as a whole. Assume that Division A's manufacturing capacity is 21,100 circuit boards. Next year, Division B wants to purchase 7,800 circuit boards from Division A rather than 6,800. (Circuit boards of this type are not available from outside sources.) What should Division A do from the standpoint of the company as a whole? Sell the 1,000 additional circuit boards to Division B. Continue to sell the circuit boards to outside customers.

Explanation / Answer

1.

3840200

(21100*182)

4624000

(6800*680)

2342100

(21100*111)

1360000

(6800*200)

3702100

1237600

(6800*182)

2. sell the 1000 additional units to division B, because the division B is generating more profit rather than division A, so hence additional anits can be sold to division B instead of selling to ousiders

Division A Division B Company as a whole sales

3840200

(21100*182)

4624000

(6800*680)

8464200 Variable cost

2342100

(21100*111)

1360000

(6800*200)

3702100

Transfer price paid -

1237600

(6800*182)

1237600 Total expenses 2342100 2597600 4939700 Net operating income 1498100 2026400 3524500

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