Use the following to answer questions:
Madison Co. has two divisions: Chocolate and Mocha. The Chocolate Division produces the chocolate to be used in Mocha Instant produced by the Mocha Division. Mocha Instant sells for $2.00 a cup. Chocolate Division's costs are $1.50 per cup. Mocha Instant requires ¼ cup of Chocolate powder and additional $1.20 per cup for additional materials, labor and variable overhead.
-What is the Mocha Division's operating income for 4 cups of Mocha Instant, assuming the transfer price of the ingredient is set at $2.25 per cup.
A) $2.25
B) $1.35
C) $1.10
D) $0.95

Question

Quizplus · Accepted Answer

The cost for 4 cups of Mocha Instant includes 1 cup of Chocolate powder at $2.25 and $4.80 for additional materials, labor, and overhead ($1.20 per cup). Total cost is $7.05. Revenue from selling 4 cups is $8.00. Operating income is $8.00 - $7.05 = $0.95.

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