Problem
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:
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Selling price per circuit board
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$ 182
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Variable cost per circuit board
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$ 115
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Number of circuit boards:
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Produced during the year
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21,200
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Sold to outside customers
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15,400
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Sold to Division B
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5,800
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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 $630 each.
Task
I. Calculate the net operating incomes earned by Division A, Division B, and the company as a whole.
II. Assume Division A's manufacturing capacity is 21,200 circuit boards. Next year, Division B wants to purchase 6,800 circuit boards from Division A rather than 5,800. (This type of circuit boards are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional circuit boards to Division B or continue to sell them to outside customers?