Question

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $217 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 $180 per unit. a. If a transfer price of $197 per unit is established and 43,300 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Ziegler Inc.’s total operating income increase?

Answer 1

A.$1,602,100

B.$866,000

C. $736,100

Step-by-step explanation:

A. Calculation for how much would Ziegler Inc.’s total operating income increase

Using this formula

Increase in total operating income =(Purchased from outside suppliers-Variable cost per unit) *Units of materials transferred

Let plug in the formula

Increase in total operating income=($217 per unit-$180 per unit) *43,300 units

Increase in total operating income=$37*43,300 units

Increase in total operating income=$1,602,100

Therefore the amount that Ziegler Inc.’s total operating income will increase is $1,602,100

B. Calculation for How much would the Instrument Division's operating income increase

Using this formula

Increase in Division's operating income=(Purchased from outside suppliers -Transfer price per unit) *Units of materials transferred

Let plug in the formula

Increase in Division's operating income=($217 per unit-$197 per unit) *43,300 units

Increase in Division's operating income=$20*43,300 units

Increase in Division's operating income=$866,000

Therefore the amount that Ziegler Inc.’s Instrument Division's operating income increase will be $866,000

C. Calculation forn How much would the Components Division's operating income increase

Using this formula

Increase in Components Division's operating income=(Transfer price-Variable cost) *Units of materials transferred

Let plug in the formula

Increase in Components Division's operating income=($197 per unit-$180 per unit) *Units of materials transferred

Increase in Components Division's operating income=$17*43,300

Increase in Components Division's operating income$736,100

Therefore the amount that the Components Division's operating income will increase is $736,100