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	$	187
Variable cost per circuit board	$	117
Number of circuit boards:
Produced during the year		20,100
Sold to outside customers		14,700
Sold to Division B		5,400

  
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 $620 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 20,100 circuit boards. Next year, Division B wants to purchase 6,400 circuit boards from Division A rather than 5,400. (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    Expenses:    Added by the division Transfer price paid Total expenses Net operating income

Assume Division A’s manufacturing capacity is 20,100 circuit boards. Next year, Division B wants to purchase 6,400 circuit boards from Division A rather than 5,400. (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?

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	Continue to sell the additional 1,000 circuit boards to outside customers.radio button unchecked1 of 2 Sell the 1,000 additional circuit boards to Division B.

Answer 1

1.)

Income Statement
	Division A	Division B	Total Company
Sales	3758700	3348000	6096900
Expenses:
Added by the division	2351700	1134000	3485700
Transfer price paid	-	1009800
Less; Total Expenses	2351700	2143800	3485700
Net Operating Income	1407000	1204200	2611200

Workings:

Income Statement
	Division A	Division B	Total Company
Sales	(14,700+5,400) × $187	5,400 × $620	(14700×$187)+(5400×$620)
Expenses:
Added by the division	(14,700+5,400) × $117	5,400 × $210	3485700
Transfer price paid	-	5,400 × $187	0
Total Expenses	2351700	2143800	3485700
Net Operating Income	1407000	1204200	2611200

2.)

Answer:

Sell the 1,000 additional circuit boards to Division B

Explanation:

Division A should sell the 1,000 additional circuit boards to Division B because the Division B will be able to earn some additional profit for the company with no effect on Division A. Since the selling price for internal transfers and to outside parties is same, choice of the selling option doesn't matter to division A because both options produce same profit. But the division B can produce additional profit to the company as a whole.  

Incremental profit to the company = ($620 - $187 -$210) × 1,000

= $223 × 1,000 units

= $223,000