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	$	119
Number of circuit boards:
Produced during the year		20,700
Sold to outside customers		15,700
Sold to Division B		5,000

  
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 $210 in additional variable cost per instrument and then sold the instruments for $680 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 20,700 circuit boards. Next year, Division B wants to purchase 6,000 circuit boards from Division A rather than 5,000. (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. Income statement

	Division A	Division B	Company (Total )
Revenue (a)	176*20700 =3643200	680*5000 =3400000	7043200
Less: Cost of goods sold	119*20700 =2463300	176*5000 =880000
Less: additional Variable cost		210*5000 =1050000
Total cost of goods sold (b)	2463300	1930000	4393300
Profit (a-b)	1179900	1470000	2649900

2. Now the demand of division B is 6000 circuit boards.

Since division A sells at constant price to both outsiders and to division B, there will be no change in the profit structure of division A.

For each circuit board sold, division B earns = $680-$176-$210=$294 per board

And by selling those 1000 units by division B, company earns additional $294000 .

Since there is increase in $294000 of company's profit by selling 6000 units to division B instead of outsiders, Division A should sell them to division B for the overall benefit of the company.

However, in any case division A profits will remain same.

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