Materials used by Beta-Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $15 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 $12 per unit. A transfer price of $13 per unit is established, and 50,000 units of material are transferred with no reduction in Division 6's current sales. How much would Division 3's income from operations increase?
A) $150,000
B) $50,000
C) $100,000
D) $25,000

Question

Quizplus · Accepted Answer

Cost savings from buying from Division 6: $15 - $12 = $3 per unit
Total cost savings from transferring 50,000 units: $3 x 50,000 = $150,000
Increase in income from operations for Division 3: $150,000 - ($13 x 50,000) = $100,000

Materials Used by Beta-Products Inc