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	$	176
Variable cost per circuit board	$	120
Number of circuit boards:
Produced during the year		21,200
Sold to outside customers		14,100
Sold to Division B		7,100

  
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 $610 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 8,100 circuit boards from Division A rather than 7,100. (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.

	Division A	Division B	Total
Sales Revenue	$     37,31,200	$     43,31,000	$     80,62,200
Variable Costs	$     25,44,000	$     15,62,000	$     41,06,000
Purchase Cost		$     12,49,600	$     12,49,600
Contribution Margin	$    11,87,200	$    15,19,400	$    27,06,600

Since fixed costs are not given, only contribution margin could be worked out

2.
Division A should sell the additional boards to Division A, since same price is charged from Division B as of outside customers, so no contribution margin would be lost