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 A's income from operations increase?
A) $0
B) $75,000
C) $25,000
D) $50,000

Question

Quizplus · Accepted Answer

Division A's variable cost for producing 25,000 units of material is 25,000 x $8.50 = $212,500.
The transfer price is $9.50 per unit, so Division A earns 25,000 x $1.00 = $25,000 in profit from the transfer.
Therefore, Division A's income from operations would increase by $25,000.

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