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 Jefferson's total income from operations increase?
A) $37,500
B) $100,000
C) $62,500
D) $150,000

Question

Quizplus · Accepted Answer

The transfer price of $9.50 per unit is higher than the variable cost of $8.50 per unit incurred by Division A. Therefore, Division A will earn a profit of $1 per unit on the 25,000 units transferred. This will increase Jefferson's total income from operations by $25,000 (25,000 units x $1 per unit). In addition, Division C will save $1.50 per unit on the 25,000 units purchased from Division A, resulting in a savings of $37,500 (25,000 units x $1.50 per unit). Therefore, the total increase in Jefferson's income from operations is $37,500 + $25,000 = $62,500.

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