Question

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 $7.50 per unit. A transfer price of $8.50 per unit is negotiated and 30,000 units of material are transferred from Division A to Division C, with no reduction in Division A's current sales. How much would Jefferson's total income from operations increase

Answer 1

$75,000

Step-by-step explanation:

Since both divisions are part of Jefferson Company, intercompany sales cannot yield a profit once the balance sheet is consolidated. In this case, Jefferson Company is saving $10 - $7.50 = $2.50 per unit and since it needed 30,000 units, it saved a total of $2.50 x 30,000 = $75,000. Whenever you save money, your profits will increase by the same amount.