Obj 5 Materials used by the Instrument Division of TKong Ind

Obj. 5 Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $175 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $122 per unit a. If a transfer price of $148 per unit is established and 50,000 units of materials are transferred, with no reduction in the Components Division\'s current sales, how much would T Kong Industries\' total income from operations increase? Answer b. How much would the Instrument Division\'s income from operations increase? c. How much would the Components Division\'s income from operations increase?

Solution

a.

Total income of industry increases if the payment to suppliers is stopped by the reduction of internal variable cost.

Increasing income of industry = (Suppliers’ cost per unit – Variable cost per unit) × Units

                                                 = (175 – 122) × 50,000

                                                 = $53 × 50,000

                                                 = $2,650,000 (Answer)

b.

Income increases in the inst division by the difference of suppliers’ cost and transfer price from the comp division.

Increasing income of inst = (Suppliers’ cost per unit – Transfer price per unit) × Units

                                           = (175 – 148) × 50,000

                                           = $27 × 50,000

                                           = $1,350,000 (Answer)

c.

Income increases in the comp division by the difference of transfer price to inst division and the variable cost per unit

Increasing income of comp = (Transfer price per unit – Variable cost per unit) × Units

                                              = (148 – 122) × 50,000

                                              = $26 × 50,000

                                              = $1,300,000 (Answer)

Checking for correct Answer:

The above answers are correct if (b + c = a). Therefore, (1,350,000 + 1,300,000 = 2,650,000) correct.