Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2566165 • 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: $ 186 111 Produced during the year Sold to outside customers Sold to Division B 20,500 14,100 6,400 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 $230 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. 2. Assume Division A's manufacturing capacity is 20,500 circuit boards. Next year, Division B wants to purchase 7,400 circuit boards from Division A rather than 6,400. (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
1. Income Statement
2. If 7400 units are sold to Division B instead to Outside Customers
From the standpoint of the company as a whole, Division A should sell the additional 1,000 units to Division B instead selling to outside customers.This will increase the Overall Contribution of the company by $244,000 (3,343,100 - 3,099,100). And this will not at all effect the contribution Margin of Division A.
Particulars Working Division A Woking Division B Working Company Sales (14,100 +6,400)*186 3,813,000 6,400*660 4,224,000 (14,100*186) +(6,400*660) 6,846,600 Less : Variable Cost 20,500*111 2,275,500 6,400*(186+230) 2,662,400 (20,500*111)+(6,400*230) 3,747,500 Contribution Margin 1,537,500 1,561,600 3,099,100