Question

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 1

Answer:

$2,650,000

Explanation:

For Instrument Division:

Increase in Income per unit:

= Existing Purchase Price - New Purchase Cost (Transfer price)

= $175 - $148

= $27

Total Savings/Increase in Income:

= Number of units × Increase in Income per unit

= 50,000 × $27

= $1,350,000

For Components Division:

Increase in Income per unit:

= Sales or transfer price - Variable Cost

= $148 - $122

= $26

Total Savings/Increase in Income:

= Number of units × Increase in Income per unit

= 50,000 × $26

= $1,300,000

Therefore, the total income from operations increase is as follows:

= Instrument division increase in income + Component division increase in income

= $1,350,000 + $1,300,000

= $2,650,000