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 Jefferson's total income from operations increase?
A) $37,500
B) $100,000
C) $62,500
D) $150,000

Question

Quizplus · Accepted Answer

The transfer price of $9.50 per unit is higher than the variable cost of $8.50 per unit, so Division A will make a profit of $1 per unit on the transfer. Division C will save $1.50 per unit on the purchase of materials, so its income from operations will increase by $25,000 x $1.50 = $37,500.

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