Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2573413 • 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: $126 Produced during the year Sold to outside customers Sold to Division E 20,200 15,400 4,800 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 $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 20,200 circuit boards. Next year, Division B wants to purchase 5,800 circuit boards from Division A rather than 4,800. (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? Complete this question by entering your answers in the tabs below Required 1Required 2 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 Required 1 Required 2>Explanation / Answer
ans 1 Division A Division B Total Sales 3737000 3072000 5921000 (185*20200) (4800*640) (185*15400)+(4800*640) Expenses Added by the division 2545200 1296000 3841200 (126*20200) (270*4800) Transfer price paid 888000 888000 (185*4800) Net operating Income 1191800 888000 1191800 ans 2 Yes the transfer of 1000 additional boards should be made to Division B As there is increase in contribution margin in Diviison B by (640-185)- 270 (additional cost )= 185 So as the contribution margin increases per board by $185, so the company as a whole will have advantage of $185000 (185*1000). Hence it is better to sell 1000 additional units to Division B