North Division sells a part internally to South Division.South Division uses the part to produce inexpensive products sold at discount stores.North Division incurs costs of $1.50 per part,while South Division incurs additional costs of $4.80 per product.North Division sells the part to South Division for $2.00 per part.The final product is sold to external customers for $8.00 each.Which of the following formulas correctly reflects the company's operating income?
A) $8.00 - $1.50 - $4.80 - $2.00 = $(0.30)
B) $8.00 - $1.50 - $4.80 = $1.70
C) $8.00 - $4.80 -$2.00 = $1.20
D) $8.00 - $1.50 = $6.50

Question

Quizplus · Accepted Answer

The correct formula to calculate the company's operating income is to subtract the total costs incurred from the final sale price. The costs include both the cost of production for North Division ($1.50) and the additional costs incurred by South Division ($4.80). The internal transfer price ($2.00) is not subtracted again because it's an internal transaction and not an external cost. Therefore, the operating income is calculated as $8.00 (sale price) - $1.50 (North Division's cost) - $4.80 (South Division's additional costs) = $1.70.

North Division Sells a Part Internally to South Division