Materials used by Meeta-Products Inc.in producing Division A's product are currently purchased from outside suppliers at a cost of $12 per unit.However, the same materials are available from Division B.Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $7 per unit.A transfer price of $9 per unit is established, and 35,000 units of material are transferred with no reduction in Division B's current sales. How much would Division A's operating income increase?
A) $175,000
B) $70,000
C) $105,000
D) $75,000

Question

Quizplus · Accepted Answer

If Division A continues to purchase materials from outside suppliers, the cost would be $12 per unit. But if they transfer materials from Division B, the cost would be $9 per unit. So, by transferring 35,000 units of material, Division A can save $3 per unit.

The total cost savings for Division A would be:

$3 savings per unit x 35,000 units = $105,000

Therefore, Division A's operating income would increase by $105,000 if they transfer materials from Division B.

Materials Used by Meeta-Products Inc