Exercise 11A-2

Transfer Pricing from the Viewpoint of the Entire Company [LO11-5] 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 $ 127 Number of circuit boards: Produced during the year 20,500 Sold to outside customers 14,700 Sold to Division B 5,800 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 $230 in additional variable cost per instrument and then sold the instruments for $620 each.

Required:

1. Prepare income statements for Division A, Division B, and the company as a whole.

2. Assume Division As manufacturing capacity is 20,500 circuit boards. Next year, Division B wants to purchase 6,800 circuit boards from Division A rather than 5,800. (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?