Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2513453 • 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 Number of circuit boards: $ 183 Produced during the year Sold to outside customers Sold to Division B 20,800 15,400 5,400 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 $280 in additional variable cost per instrument and then sold the instruments for $640 each. Required 1. Prepare income statements for Division A, Division B, and the company as a whole 2. Assume Division A's manufacturing capacity is 20,800 circuit boards. Next year, Division B wants to purchase 6,400 circuit boards from Division A rather than 5,400. (Circuit boards of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the additional 1,000 circuit boards to Division B or continue to sell them to outside customers?Explanation / Answer
Solution 1:
Solution 2:
As profit of company will increase by $177,000 on sale of addtional circuit board to division B, therefore Division A should sell additional 1000 circuit boards to Division B.
Divisional Income Statement Particulars Division A Division B Total Sales $3,806,400.00 $3,456,000.00 $7,262,400.00 Expenses: Added by division $2,433,600.00 $1,512,000.00 $3,945,600.00 Transfer price paid $988,200.00 $988,200.00 Total Expenses $2,433,600.00 $2,500,200.00 $4,933,800.00 Net Operating Income $1,372,800.00 $955,800.00 $2,328,600.00