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 would Division 3's income from operations increase?
A) $150,000
B) $50,000
C) $32,000
D) $72,000

Question

Quizplus · Accepted Answer

If Division 3 purchased materials from outside suppliers, they would have paid $5 per unit. However, if they purchase from Division 6, they will be charged $3.20 per unit. This means that Division 3 will save $1.80 in costs for each unit of material purchased from Division 6.

Therefore, the total cost savings for Division 3 would be:

$1.80 savings per unit x 40,000 units = $72,000

Since the cost savings would increase Division 3's income from operations, the answer is D) $72,000.

Materials Used by Square Yard Products Inc