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:

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	$	176
Variable cost per circuit board	$	123
Number of circuit boards:
Produced during the year		21,800
Sold to outside customers		15,000
Sold to Division B		6,800

 
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 $210 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 21,800 circuit boards. Next year, Division B wants to purchase 7,800 circuit boards from Division A rather than 6,800. (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?

Explanation

1.
Sales for Division A: 21,800 units × $176 per unit = $3,836,800.
Sales for Division B: 6,800 units × $690 per unit = $4,692,000.
 

Total company sales:
Division A outside sales (15,000 units × $176 per unit)	$	2,640,000
Division B outside sales (6,800 units × $690 per unit)		4,692,000
Total outside sales	$	7,332,000

2.

Division A should transfer the 1,000 additional circuit boards to Division B. Note that Division B’s processing adds $514 to each unit’s selling price (B’s $690 selling price, − A’s $176 selling price = $514 increase), but it adds only $210 in cost. Therefore, each board transferred to Division B ultimately yields $304 more in contribution margin ($514 − $210 = $304) to the company than can be obtained from selling to outside customers. Thus, the company as a whole will be better off if Division A transfers the 1,000 additional boards to Division B.

Thanks