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	$	184
Variable cost per circuit board	$	126
Number of circuit boards:
Produced during the year		20,800
Sold to outside customers		15,000
Sold to Division B		5,800

  
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 $230 in additional variable cost per instrument and then sold the instruments for $680 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 6,800 circuit boards from Division A rather than 5,800. (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?

Answer 1

1. Income Statement:

	Division A ($)	Divison B ($)	Total ($)
Sales	$3,827,200 (20,800 x 184)	$3,944,000 (5800 x 680)	$7,771,200
Less:Variable Cost	2,620,800 (20800 x 126)	1,334,000 (5800 x 230)	3,954,800
Less: Cost of Goods	-	1,067,200 (5800 x 184)	1,067,200
Contribution Margin	$1,206,400	$1,542,800	$2,749,200

2. Company should sell the 1,000 additional circuit boards to Division B because it will result in higher profit for the Company as a whole. Not only Division A will earn profit on the additional Boards sold to B, but Division B will also earn Profit on them.