Question

Materials used by Jefferson Company in producing the 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 will Jefferson's total income from operations increase?

Answer 1

The increase in Jefferson Company's total income from operations will be $37,500.

Step-by-step explanation:

To calculate the increase in Jefferson Company's total income from operations, we need to compare the costs of purchasing materials from outside suppliers and producing them internally in Division A. Currently, the materials are purchased at a cost of $10 per unit. However, Division A can produce the same materials 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 without affecting Division A's current sales.

The increase in total income from operations can be calculated as follows:

Total cost savings = (Cost of purchasing externally - Cost of producing internally) * Number of units transferred

Total cost savings = ($10 - $8.50) * 25,000

Total cost savings = $1.50 * 25,000

Total cost savings = $37,500