Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10 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 $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales.
How much will Division C's income from operations increase?
A) $0
B) $75,000
C) $12,500
D) $50,000

Question

Quizplus · Accepted Answer

Division C's cost for 25,000 units of material will decrease from $10 to $9.50, resulting in a cost savings of $0.50 per unit. 
Therefore, the total cost savings for Division C will be: 
$0.50 savings per unit x 25,000 units transferred = $12,500 
This will increase Division C's income from operations by $12,500.

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