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$192

Variable cost per circuit board$112

Number of circuit boards:

Produced during the year 20,500

Sold to outside customers 14,600

Sold to Division B 5,900

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 $640 each.

1. Calculate the net operating incomes earned by Division A, Division B, and the company as a whole.

2. Assume Division A’s manufacturing capacity is 20,500 circuit boards. Next year, Division B wants to purchase 6,900 circuit boards from Division A rather than 5,900. (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 1,000 additional circuit boards to Division B or continue to sell them to outside customers?

Answer 1