in producing Division 3s product are currently purchased fro

in producing Division 3\'s product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6\'s current sales.

How much will Square Yard Products total income from operations increase?

a.$32,000

b.$150,000

c.$80,000

d.$112,000

Solution

Answer:

Total Square Yard Products income from operations increase = c.$80,000

Working notes for the above answer is as under

Increase in Square Yard Products income from Operation

=Increase in Division 3 income from operation+ Increase in Division 6 income from operation

=((market price - transfer price) x Unit transferred)+ (transfer price-variable cost) x Unit transferred

=((5-3.20) x 40,000 ) + (3.20-3) x40,000

=(1.80 x40,000 ) + (0.20x40,000)

=72000+8000

=$80,000

Square Yard Products total income from operations increase =$80,000