Exercise 11A-3 Transfer Pricing from the Viewpoint of the Entire Company [LO6]

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 was recorded in Division A:

Selling price per circuit board$125Variable cost per circuit board$90Number of circuit boards:Produced during the year20,000Sold to outside customers16,000Sold to Division B4,000

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. Division B incurred $100 in additional variable cost per instrument and then sold the instruments for $300 each.

Required:

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

2. Assume that Division A's manufacturing capacity is 20,000 circuit boards per year. Next year, Division B wants to purchase 5,000 circuit boards from Division A, rather than only 4,000 components, as it did last year. Circuit boards of this are not available from outside sources. What should Division A do from the standpoint of the company as a whole?

• Sell the 1,000 additional circuit boards to Division B.
• Continue to sell the circuit boards to outside customers.