Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 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 $3.00 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.
-Division 3's operating income will increase by
A)$150,000
B)$50,000
C)$32,000
D)$72,000

Question

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 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 $3.00 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.​
-Division 3's operating income will increase by
A)$150,000
B)$50,000
C)$32,000
D)$72,000

Quizplus · Accepted Answer

Division 3's operating income increases by $72,000 because they save $1.80 per unit ($5.00 - $3.20) on 40,000 units, which equals $72,000 (40,000 units * $1.80 savings per unit).

Materials Used by Square Yard Products Inc