Exercise 11-7 (Algo) Transfer Pricing from the Viewpoint of the Entire Company [LO11-3]

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	$	188
Variable cost per circuit board	$	129
Number of circuit boards:
Produced during the year		20,900
Sold to outside customers		14,900
Sold to Division B		6,000

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 $250 in additional variable cost per instrument and then sold the instruments for $650 each.

Required:

1. Calculate the net operating incomes earned by Division A, Division B, and the company as a whole.

2. Assume Division As manufacturing capacity is 20,900 circuit boards. Next year, Division B wants to purchase 7,000 circuit boards from Division A rather than 6,000. (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 1,000 additional circuit boards to Division B or continue to sell them to outside customers?