Question

Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $418 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 $347 per unit. a. If a transfer price of $380 per unit is established and 31,600 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? 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

Solution a:

T_Kong Industries' Total Income Increase by = (Current Purchase price - Variable cost Needed to make the component) * units transferred

= ($418 - $347) * 31600 = $2,243,600

Solution b:

Instrument division's Income Increase by = (Current Purchase price - Transfer price) * units

= ($418 - $380) * 31600 = $1,200,800

Solution c:

Component division's Income Increase by = (Transfer price - Variable cost) * units

= ($380 - $347) * 31600 = $1,042,800