Question

CalculatorMaterials used by Square Yard Products Inc. 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 Division 3's income from operations increase

Answer 1

Answer:

Total increase in operating income = $1.80 $\times$ 40,000 units = $72,000.

Explanation:

Division 6 can produce the product required by Division 3 at the variable cost of $3.00 since it has an ideal capacity left, thus no other fixed cost will be incurred.

Further provided Division 3 buys it from outside suppliers at the rate of $5.00, now it can buy from Division 6 at the rate of $3.20 per unit.

Therefore it will save about $5.00 - $3.20 = $1.80 per unit, which will increase its operating income with the same, therefore

Total increase in operating income = $1.80 $\times$ 40,000 units = $72,000.