The Components Division manufactures components used in GPS devices. The components can be sold either to the Watch Division of the same company or to outside customers. Last year, the following activity was recorded in the Components Division:

Sales to the Watch Division were at the same price as sales to outside customers. The components purchased by the Watch Division were used in a sports watch manufactured by that division. The Watch Division incurred $30 in additional variable cost per watch and then sold them for $100 each.

Required:
1. Prepare income statements for last year for each division and the company as a whole.
2. Assume that the Components Division's manufacturing capacity is 10,000 components per year. Next year, the Watch Division wants to purchase 3,000 components from the Components Division, rather than only 2,000 components, as it did last year. Components of this specific type are not currently available from outside sources. From the standpoint of the company as a whole, should the Components Division sell the 1,000 additional components to the Watch Division, or should it continue to sell them to outside customers? Explain.

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Selling price per component.... Variable cost per component.... Number of components: Produced during the year Sold to outside customers. Sold to Watch Division.. **** $25 $10 10,000 8,000 2,000