Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2531022 • 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 $192 $130 Number of circuit boards Produced during the year Sold to outside customers 20,300 14,300 6,000 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 $300 in additional variable cost per instrument and then sold the instruments for $690 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 income 2. Assume that Division A's manufacturing capacity is 20,300 circuit boards. Next year, Division B wants to purchase 7,000 circuit boards from Division A rather than 6,000. (Circuit boards of this type are not whole? available from outside sources.) What should Division A do from the standpoint of the company as a O Sell the 1,000 additional circuit boards to Division B O Continue to sell the circuit boards to outside customersExplanation / Answer
From the viewpoint of company as a whole, Division A should transfer the additional requirement of 1,000 circuit boards.
Reason - The additional 1,000 circuit boards tansferred to division B will result in additional income of $ 198 per unit when the same is sold by division B to outside customers after further processing in Division B.
Division A Division B Total Total (Eliminating Inter Divison Transfers) Sales 38,97,600 41,40,000 80,37,600 68,85,600 Expenses: Added by the Division 26,39,000 18,00,000 44,39,000 44,39,000 Transfer price paid - 11,52,000 11,52,000 - Total Expenses 26,39,000 29,52,000 55,91,000 44,39,000 Net Operating Income 12,58,600 11,88,000 24,46,600 24,46,600