Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2513808 • 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:
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 $670 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 7,100 circuit boards from Division A rather than 6,100. (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?
Selling price per circuit board $ 190 Variable cost per circuit board $ 124 Number of circuit boards: Produced during the year 20,800 Sold to outside customers 14,700 Sold to Division B 6,100Explanation / Answer
1) Preparation of income statement of division A& B & Company :
3,952,000
(20,800*190)
4,087,000
(6100*670)
(1,159,000)
6100*190
(2,579,200)
20,800*124
(1,647,000)
6100*270
2) Profit if 7,100 sold to Division B :
3,952,000
(20,800*190)
4,757,000
(7100*670)
(1,349,000)
7100*190
(2,579,200)
20,800*124
(1,917,000)
7100*270
Since the profit was increased by selling 7,100 boards to division B. It is better to sell 7,100 boards to division B.
Particulars Division A Division B Company Sales3,952,000
(20,800*190)
4,087,000
(6100*670)
8,039,000 Less : Purchase from A(1,159,000)
6100*190
(1,159,000) Variable cost A(2,579,200)
20,800*124
(2,579,200) Additional Variable cost B(1,647,000)
6100*270
(1,647,000) Profit 1,372,800 1,281,000 2,653,800