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Materials used by Aro-Products Inc. in producing Division 3\'s product are curre

ID: 2358764 • Letter: M

Question

Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. How much would Division 6's income from operations increase?

Explanation / Answer

Increase in income = 40000*(3.2-3) =$8000

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