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	$	190
Variable cost per circuit board	$	118
Number of circuit boards:
Produced during the year		20,500
Sold to outside customers		15,600
Sold to Division B		4,900

  
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 $290 in additional variable cost per instrument and then sold the instruments for $670 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 20,500 circuit boards. Next year, Division B wants to purchase 5,900 circuit boards from Division A rather than 4,900. (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 additional 1,000 circuit boards to Division B or continue to sell them to outside customers?

Answer 1

1 Particulars 2 Selling Price 3 Variable Cost-Mfg 4 5 Contribution/Unit Circuit Board Instrument Company Author: Since it has purchased it From A @190 P.u 118 0 72 190 290 190 Other 7 Units Sold 8 Contribution Total 4900 1476000 931000 2407000 10 If Division A sells 5900 Boards to Division B 11 Particulars 12 Contribution/Unit Circuit Board Instrument Company 72 190 14 Sales Units 15 Contribution Total 16 17 Note:- Even Without preparing this table it is evident that,Contribution p.u 18 from Instrument is higher then the Contribution p.u of Board,Hence it is 19 advisable that the company should sell 5900 boards to Division B and 19500 20 in the market 21 22 Therfore from the overall company's Profitability point of view,1000 additional 23 units should be supplied to division B 19500 1404000 1121000 2525000 5900

if division A will sell to Division B then the company as a whole would get additional contribution of 118(190-72) per unit from sale of instrument since if these 1000 units would have been sold to outside customers then it would have genarted revenue of only Rs. 72 per unit,whereas if these are trfd to Division B they would still generate rs. 72 for Division A and Division B by further workiing on them can generate Contribution of Rs. 118(190-72)p/u . So overall it is beneficial for the company as a whole