Question

Division A manufactures electronic circuit boards. The boards can be sold elther to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: $ $ 191 113 Selling price per circuit board Variable cost per circuit board Number of circuit boards: Produced during the year Sold to outside customers Sold to Division B 21,900 15,700 6.200 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 21,900 circuit boards. Next year, Division B wants to purchase 7,200 circuit boards from Division A rather than 6,200. (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	Total Company
Sales	[(15,700 + 6,200)*191]	[6,200 * 690]	[15700*191+6200*690]
	4,182,900	4,278,000	7,276,700
Expenses :
Added by the division	[21,900 * 113]	[6,200 * 270]
	2,474,700	1,674,000	4,148,700
Transfer price paid	-	[6,200 * 191]
	-	1,184,200
Total expenses	2,474,700	2,858,200	4,148,700
Net operating income	1,708,200	1,419,800	3,128,000
(2) Decision
If the Division A continues to sell the circuit boards, the profit from that 1000 units for the company is
Profit	= 1,000 * (191-113)
	= 78,000
If the division A sells the circuit boards to Division B and in turn it sells to market, then profit for the company is
Profit	= 1,000 (690-270-113)
	= 3,07,000
Since, the profit is more for the company by selling it to Division B, Division A should sell additional circuit boards to Division B