Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit.
(a) If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total income from operations increase?
(b) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division A increase?
(c) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division B increase?
(d) If the negotiated price approach is used, what would be the range of acceptable transfer prices?

Question

Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit. 
(a) If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total income from operations increase? 
(b) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division A increase? 
(c) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division B increase? 
(d) If the negotiated price approach is used, what would be the range of acceptable transfer prices?

Quizplus · Accepted Answer

The Answer of Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit. 
(a) If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total income from operations increase? 
(b) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division A increase? 
(c) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division B increase? 
(d) If the negotiated price approach is used, what would be the range of acceptable transfer prices?

Materials Used by Best Bread Company in Producing Division A's