Question

Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $301 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $250 per unit.

Answer 1

Question Completion:

a. If a transfer price of $280 per unit is established and 50,000 units of materials transferred, with no reduction in the Components Division’s current sales, how much would T_Kong Industries’ total income from operations increase?

$

b. How much would the Instrument Division's income from operations increase?

$

c. How much would the Components Division's income from operations increase?

Answer:

T_Kong Industries

1. T_Kong Industries’ total income from operations would increase by;

= $2,550,000.

2. The Instrument Division's income from operations would increase by:

= $1,050,000.

3. The Components Division's income from operations would increase by:

= $1,500,000.

Step-by-step explanation:

a) Data and Calculations:

Outside supply price = $301 per unit

Variable cost per unit = $250

Transfer price = $280

Units transferred = 50,000

Increase in total income for T_Kong Industries = $2,550,000 ($301 - $250)50,000

Instrument Division's income would increase by $1,050,000 ($301 - $280)50,000

Increase in total income for the Components Division = $1,500,000 ($280 - $250)50,000