Question

Decision on Transfer Pricing

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $446 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 $370 per unit.

a. If a transfer price of $406 per unit is established and 25,600 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Ziegler Inc.’s total operating income increase?
$

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

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

Answer 1

Working Notes: 1
	Calculation of Operating income of Component Divission
	Transfer Price Per unit	$                            406
	Less: Variable Cost Per Unit	$                            370
	Contribution / Operating income Per Unit	$                              36
	Multiply By : No. of Units Transfer	$                      25,600
	Total Increamental operating income	$                  9,21,600
Working Notes: 2
	Calculation of Increase in operating income of Instrument Divission
	Purchase Price from outside Per Unit	$                            446
	Less: Transfer price from Component divission	$                            406
	Contribution / Operating income Per Unit	$                              40
	Multiply By : No. of Units taken	$                      25,600
	Total Increamental operating income	$                10,24,000
Solution: A
	Calculation of Ziegler Inc. total operating income Increases
	Income increases of component divission (WN1)	$                  9,21,600
	Add: Income increases of Instrument divission (WN2)	$                10,24,000
	Total Increase in operating income	$                19,45,600
	Answer = $ 1,945,600
Solution: B
	Calculation of operating income Increases of instrument Divission
	Income increases of Instrument divission (WN2)	$                10,24,000
	Answer = $ 1,024,000
Solution: C
	Calculation of operating income Increases of Component Divission
	Income increases of Instrument divission (WN1)	$                  9,21,600
	Answer = $ 921,600