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 would Division C's income from operations increase?
A) $0
B) $75,000
C) $12,500
D) $50,000

Question

Quizplus · Accepted Answer

The cost savings per unit for Division C is $10 - $9.50 = $0.50. Multiply this by the 25,000 units transferred, and Division C's income from operations would increase by $12,500 ($0.50 X 25,000). Therefore, the correct answer is C) $12,500.

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