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Division A manufactures electronic circuit boards. The boards can be sold either to Division B of...

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 $ 181 Variable cost per circuit board $ 124 Number of circuit boards: Produced during the year 21,200 Sold to outside customers 14,200 Sold to Division B 7,000 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 $230 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 21,200 circuit boards. Next year, Division B wants to purchase 8,000 circuit boards from Division A rather than 7,000. (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?

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Answer #1

Solution 1:

Income statement - Division A
Particulars Amount
Sales revenue (21200*$181) $3,837,200.00
Variable costs (21200*$124) $2,628,800.00
Net operating income $1,208,400.00
Income statement - Division B
Particulars Amount
Sales revenue (7000*$630) $4,410,000.00
Variable costs [7000*($181+$230)] $2,877,000.00
Net operating income $1,533,000.00
Income statement - Company
Particulars Amount
Sales revenue (14200*$181 + 7000*$630) $6,980,200.00
Variable costs (21200*$124 + 7000*$230) $4,238,800.00
Net operating income $2,741,400.00

Solution 2:

Regular contribution margin on circuit board = $181 - $124 = $57 per board

If board is transferred to division B, additional contribution margin on electronic instrument = $630 - ($230 + $124) = $276 per instrument.

Therefore if Division A transfer 1000 extra board to division B, company as a whole will earn $276 per unit by loosing $57 per unit on regular sale. Therefore Division A should sell the additional 1,000 circuit boards to Division B

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