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	$	175
Variable cost per circuit board	$	111
Number of circuit boards:
Produced during the year		21,400
Sold to outside customers		15,400
Sold to Division B		6,000

  
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 $270 in additional variable cost per instrument and then sold the instruments for $690 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 21,400 circuit boards. Next year, Division B wants to purchase 7,000 circuit boards from Division A rather than 6,000. (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 1

1
	Division A	Division B	Total Company
Sales	$ 37,45,000	$ 41,40,000	$ 68,35,000
Less Expenses :
Added by the division	$ 23,75,400	$ 16,20,000	$ 39,95,400
Transfer Price paid		$ 10,50,000
Total expenses	$ 23,75,400	$ 26,70,000	$ 39,95,400
Net Operating Income	$ 13,69,600	$ 14,70,000	$ 28,39,600
Workings:-
1. Sales
Division A
21,400	units	X	$              175	per unit	=	$ 37,45,000
Division B
6,000	units	X	$              690	per unit	=	$ 41,40,000
Total Outside Sales
Division A Outside Sales
15400	units	X	$              175	per unit	=	$ 26,95,000
Division B Outside Sales
6,000	units	X	$              690	per unit	=	$ 41,40,000
Total Outside Sales						$ 68,35,000
2. Expenses
Added by the division
Division A
21,400	units	X	$              111	per unit	=	$ 23,75,400
Division B
6,000	units	X	$              270	per unit	=	$ 16,20,000
Transfer Price paid
6,000	units	X	$              175	per unit	=	$ 10,50,000
Note : $ 10,50,000 the inter company sales has been eliminated.
2
Division A should transfer 1,000 additional circuit boards to Division B.
Workings:-
Division B processing adds to each unit selling price ($ 690 - $ 175 = $ 515)					=	$             515
Less : Addition in Cost per unit					=	$             270
Total yeild per unit					=	$             245
Thus each board transferred to division B Ultimately yeilds $ 245 more in contribution margin to the company that can be obtained from selling to outside customers.