Materials used by Boone Company in producing Division C's product are currently purchased from outside suppliers at a cost of $20 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 $17 per unit. A transfer price of $19 per unit is negotiated and 60,000 units of material are transferred, with no reduction in Division A's current sales.
How much would Division A's income from operations increase?
A) $0
B) $180,000
C) $60,000
D) $120,000

Question

Quizplus · Accepted Answer

Division A's income from operations would increase by the difference between the transfer price and the variable cost, multiplied by the number of units transferred: ($19 - $17) * 60,000 = $120,000.

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