Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 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 $3.00 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.
-Division 6's operating income will increase by
A)$8,000
B)$15,000
C)$80,000
D)$150,000

Question

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 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 $3.00 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.​
-Division 6's operating income will increase by
A)$8,000
B)$15,000
C)$80,000
D)$150,000

Quizplus · Accepted Answer

The increase in Division 6's operating income is calculated by the difference between the transfer price and the variable cost, multiplied by the number of units transferred. This is ($3.20 - $3.00) * 40,000 = $0.20 * 40,000 = $8,000.

Materials Used by Square Yard Products Inc