Question

Decision on Transfer Pricing

Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of $295 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 $245 per unit.

a. If a transfer price of $268 per unit is established and 23,300 units of materials are transferred, with no reduction in the Components Division's current sales, how much would XPort Industries’ total income from operations increase?
$

b. How much would the Instrument Division’s income from operations increase?
$

c. How much would the Components Division's income from operations increase?
$

Answer 1

	Instrument Division	Components Division	X ports industries
Transfer Price(Revenue for Components)		$268
Variable cost		-$245
Net Operating income for Components		$23
Opportunity benefit for Instrument($295-$268)	$27
Increase in Operating inocme:
Instrument division(23,300 units*$27)	$6,29,100
Components Division(23,300 units*$23)		$5,35,900
Total Increase in Net operating income			$11,65,000