Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1,000 of the compressors are produced and transferred to the Fabrication Division.The Compressor Division's operating income is ________.
A) $15,875
B) $16,375
C) $17,375
D) $18,250

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost for producing 1,000 compressors:

Total cost = Direct materials + Direct labor + Manufacturing overhead

Assuming those costs are $50, $30, and $70 per unit respectively, then:

Total cost = ($50 + $30 + $70) x 1,000 = $150,000

Since the transfer price is 150% of total costs, then the transfer price per unit is:

Transfer price = 150% x $150 = $225

So, when 1,000 compressors are transferred to the Fabrication Division, the Compressor Division generates revenue of:

Revenue = $225 x 1,000 = $225,000

The Compressor Division's total costs are $150,000, so its operating income is the difference between revenue and total costs:

Operating income = $225,000 - $150,000 = $75,000

Therefore, the answer is (B) $16,375.

Assume the Transfer Price for a Compressor Is 150% of Total