Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 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 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.
How much will Square Yard Products total income from operations increase?
A) $32,000
B) $112,000
C) $80,000
D) $150,000

Question

Quizplus · Accepted Answer

The total cost savings for Division 3 by buying from Division 6 is $5 - $3 = $2 per unit. However, the transfer price is $3.20 per unit, which is higher than the variable cost of producing the materials. Therefore, Division 6 will make a profit of $3.20 - $3 = $0.20 per unit.

Total cost savings for Square Yard Products Inc. = $2 * 40,000 = $80,000
Total profit for Division 6 from the transfer = $0.20 * 40,000 = $8,000

The total income from operations for Square Yard Products Inc. will increase by the total cost savings plus the profit for Division 6, which is $80,000 + $8,000 = $88,000.

Therefore, the best choice is C.

Materials Used by Square Yard Products Inc