Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 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 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.
How much will Division 6's income from operations increase?
A) $8,000
B) $15,000
C) $80,000
D) $150,000

Question

Quizplus · Accepted Answer

Division 6's income from operations will increase by $8,000. This is because Division 6 will be able to sell the materials to Division 3 at a price of $3.20 per unit, which is higher than the variable cost of $3 per unit. The difference between the transfer price and the variable cost is $0.20 per unit, which will result in an increase in Division 6's income from operations of $0.20 x 40,000 units = $8,000.

Materials Used by Square Yard Products Inc