Materials used by Boone Company in producing Division C's product are currently purchased from outside suppliers at a cost of $20 per unit.However, the same materials are available from Division A.Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $17 per unit.A transfer price of $19 per unit is negotiated and 60,000 units of material are transferred, with no reduction in Division A's current sales. How much would Division A's operating income increase?
A) $0
B) $180,000
C) $60,000
D) $120,000

Question

Quizplus · Accepted Answer

- Division A's variable cost to produce the materials is $17 per unit. 
- A transfer price of $19 per unit is negotiated, which means a profit of $2 per unit for Division A. 
- 60,000 units of materials are transferred, so Division A's operating income would increase by:
    $2 per unit x 60,000 units = $120,000 
Therefore, the correct answer is D.

Materials Used by Boone Company in Producing Division C's Product