Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 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 $3.00 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 would Division 3's income from operations increase?
How much would Division 6's income from operations increase?
How much would Square Yard Products total income from operations increase?
(1) option (d) $72,000 (2) option (a)$8,000 (3) option (c)$80,000
(1) The total cost to be paid to the supplier outside is given below:
= 40,000 units x $5 per unit
The price of transfer to be paid to Division 6 is given as:
= 40,000 units x $3.20 per = $128,000
Therefore, the increase in income from operations for Division C is = $200,000 - $128,000 = = $72,000
(2) The income increase from operations is defined below:
Additional Sales x Contribution Per Unit
The per unit contribution = Transfer Price – Variable Cost
= $3.20 - $3 = $0.20 per unit
The income increase from operations for Division 6 is given as:
= 40,000 units x $0.20 per unit = $8,000
The Increase of Income from operations for Division C and the Increase in income from operations for Division 6 becomes,
= $72,000 + $8000 = $80,000
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