Division A manufactures electronic circuit boards. The boards can be sold either
ID: 2582562 • 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 195 Variable cost per circuit board 129 Number of circuit boards: Produced during the year Sold to outside customers Sold to Division B 20,200 15,800 4,400 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 $220 in additional variable cost per instrument and then sold the instruments for $620 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 5,400 circuit boards from Division A rather than 4,400. (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.
DIVISION :A
DIVISION :B
TOTAL
SALES
3939000
2728000
6667000
EXPENSES :
ADDED BY DIVISION
2605800
968000
3573800
TRANSFER PRICE
858000
TOTAL EXPENSE
2605800
1826000
4431800
NET OPERATING INCOME
1333200
902000
2235200
2.
DIVISION :A
DIVISION :B
TOTAL
SALES
3939000
3348000
6667000
EXPENSES :
ADDED BY DIVISION
2605800
1188000
3573800
TRANSFER PRICE
1053000
TOTAL EXPENSE
2605800
2241000
4431800
NET OPERATING INCOME
13,33,200
11,07,000
24,40,200
if division A sold additonal 1000 unit to division B it will increase overall profitability of 2,05,000(2440200-2235200)
so division A should accept additional order made by divisionB
DIVISION :A
DIVISION :B
TOTAL
SALES
3939000
2728000
6667000
EXPENSES :
ADDED BY DIVISION
2605800
968000
3573800
TRANSFER PRICE
858000
TOTAL EXPENSE
2605800
1826000
4431800
NET OPERATING INCOME
1333200
902000
2235200