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 | $ | 177 |
| Variable cost per circuit board | $ | 111 |
| Number of circuit boards: | ||
| Produced during the year | 21,700 | |
| Sold to outside customers | 14,700 | |
| Sold to Division B | 7,000 | |
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 $240 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 21,700 circuit boards. Next year, Division B wants to purchase 8,000 circuit boards from Division A rather than 7,000. (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?
Prepare income statements for Division A, Division B, and the company as a whole.
|
Solution 1:
| Particulars | Division A | Division B | Total Company |
| Sales | $3,840,900.00 | $4,620,000.00 | $8,460,900.00 |
| Expenses: | |||
| Added by the division | $2,408,700.00 | $1,680,000.00 | $4,088,700.00 |
| Transfer price paid | $0.00 | $1,239,000.00 | $1,239,000.00 |
| Total expenses | $2,408,700.00 | $2,919,000.00 | $5,327,700.00 |
| Net operating income | $1,432,200.00 | $1,701,000.00 | $3,133,200.00 |
Solution 2:
Additional contribution margin from additional sale of 1000 instrument of division B = ($660 - $240 - $177) * 1000 = $243,000
Therefore, From the standpoint of the company as a whole, Division A sell the additional 1,000 circuit boards to Division B
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