Question

Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $175 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 $122 per unit. a. If a transfer price of $148 per unit is established and 50,000 units of materials are 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 1

Multiple choices for the first question are:

a)$2,650,000

b)$ 1,350,000

c) $1,300,000

The correct answer to the first question is A,$2,650,000

Instrument's division net income from operations increases by $1,350,000

Component's division net income from operations increases by $1,300,000

Step-by-step explanation:

Instruments' division

The increase in instrument's division net income is computed thus:

Outside purchase price $175

internal transfer price ($148)

Savings from buying internally $27

Total savings from buying internally(50,000*$27)=$1,350,000

The instrument's division income from operations would increase by $1,350,000 as a result of buying from the Components' division

Components' division

The increase in instrument's division net income is computed thus:

transfer price to instruments' division $148

variable cost of internal transfer ($122)

Increase in profits from operations per unit $26

Total increase in profits (50,000*$26)=$1,300,000

The component's division income from operations would increase by $1,350,000 as a result of selling to instruments' division

Total increase in T-kong industries=$1,350,000+$1,300,000=$2,650,000