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	$	186
Variable cost per circuit board	$	128
Number of circuit boards:
Produced during the year		22,000
Sold to outside customers		14,500
Sold to Division B		7,500

  
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 $260 in additional variable cost per instrument and then sold the instruments for $670 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 22,000 circuit boards. Next year, Division B wants to purchase 8,500 circuit boards from Division A rather than 7,500. (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.

	Division A Division B Total Company Sales $4,092,000 $5,025,000 Expenses: Added by the division Transfer price paid Total expenses 0 0 0 Net operating income $4,092,000 $5,025,000 $0

Assume Division A’s manufacturing capacity is 22,000 circuit boards. Next year, Division B wants to purchase 8,500 circuit boards from Division A rather than 7,500. (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?

	Continue to sell the additional 1,000 circuit boards to outside customers Sell the 1,000 additional circuit boards to Division B.

Answer 1