Division X sells organic high-gluten flour to Division Y. Division X incurs costs of $0.375 per kilogram of flour. Division Y makes loaves of bread that sell for $2.50 each. Division Y incurs costs of $1.25 per loaf, excluding the cost of flour. Each loaf of bread uses one-half kilogram of flour.
What is the operating income per loaf for Division Y if the transfer price is set at $0.625 per kilogram for flour?

Question

Quizplus · Accepted Answer

Division Y incurs a cost of $0.625 per half kilogram of flour ($0.375 x 2) purchased from Division X. Thus, the total cost per loaf for Division Y is $1.25 + $0.625 = $1.875. 
Revenue per loaf is $2.50.
Operating income per loaf = Revenue per loaf - Total cost per loaf = $2.50 - $1.875 = $0.6250.
Therefore, the operating income per loaf for Division Y is $0.9375.

Division X Sells Organic High-Gluten Flour to Division Y