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 Variable cost per circuit board Number of circuit boards: $ 176 $124 Produced during the year Sold to outside customers Sold to Division B 20,400 14,800 5,600 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 $250 in additional variable cost per instrument and then sold the instruments for $630 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 20,400 circuit boards. Next year, Division B wants to purchase 6,600 circuit boards from Division A rather than 5,600. (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? Complete this question by entering your answers in the tabs below Required 1 Required 2 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

Answer 1

Division A Division B Total Compan Sales (a Expenses: Added by the division Transfer price paid Total Expenses (b) Net Operating Income (a-b) 3,590,400 3,528,000 6,132,800 2,529,600 1,400,000 985,600 2,385,600 1,142,400 3,929,600 2,529,600 3,929,600 1,060,800 2,203,200 Working Notes: Division A Sales to outsider Sale to Division B Total Sales 14,800 x 176 2,604,800 985,600 3,590,400 (5,600 x 176) Division B Sales to outsider 5,600 x 630 3,528,000 Total Sales of Company to outsider Division A Division B Total Sales to Outsider 2,604,800 3,528,000 6,132,800 Expenses Added by Division Division A Division B 20,400 x 124 5,600 x 250 2,529,600 1,400,000 Note: $985,600 intracompany division sales to be eliminated

2) Division A Selling Price to outsiders (a) | 176 utsiders (b) 630 Incremental selling price (b-a) Less: Additional Cost Incremental Profit 454 (250) 204 Divison A should sell the additional circuit to division B Analysis So, Division A should sell the additional units of 1,000 circuits to the division B because it will earns $204 per unit more contribution margin. So, Company as a whole should be better position if Division A sell the goods to Division B