Question

Materials 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 would Division 3's income from operations increase?

Answer 1

Answer:

Increase in income from Operations = $72,000

Explanation:

Current cost of purchasing the inventory = $5 per unit.

Purchase price if bought from Division 6 = $3.20

Net benefit on each unit = $5 - $3.20 = $1.80

Number of units purchased = 40,000

Net savings in Expense of purchase of raw material, which will result in increase in income from operation's by = 40,000 $\times$ $1.80

= $72,000.00