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 Boone's total operating income increase?
A) $180,000
B) $240,000
C) $120,000
D) $300,000

Question

Quizplus · Accepted Answer

By purchasing the materials internally at $19 per unit instead of $20 from external suppliers, Boone Company saves $1 per unit. For 60,000 units, the total savings are $60,000 * $1 = $60,000. However, Division A also benefits because it produces the materials at a variable cost of $17 per unit and sells them at $19 per unit, making a profit of $2 per unit. For 60,000 units, this results in additional income of $120,000 ($2 * 60,000). The total increase in operating income for Boone Company is the sum of savings and additional income, which is $60,000 + $120,000 = $180,000.

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