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	$	183
Variable cost per circuit board	$	115
Number of circuit boards:
Produced during the year		20,600
Sold to outside customers		14,800
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 $210 in additional variable cost per instrument and then sold the instruments for $650 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 20,600 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
		Div A	Div B	Total
	Selling price	183	650
	Units sold	20600	5800
	Total sales	3769800	3770000	7539800
	Less Variable cost
	Purchase cost	-	1061400	1061400
	Variable manufacturing cost	2369000	1218000	3587000
	Contribution margin	1400800	1490600	2891400
2	From the sand point of co as a whole	Amount
	Company's total contribution if sold to B	325000
	(1000)*(650-210-115)
Less	Contribution if 1000 units sold outside	68000
	(1000)*(183-115)
	Increase in contribution	257000
	So, Div A should sell to Div B.