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 | $ | 176 |
Variable cost per circuit board | $ | 125 |
Number of circuit boards: | ||
Produced during the year | 21,200 | |
Sold to outside customers | 14,200 | |
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 $220 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 21,200 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?
Answer is given below
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