Materials used by Jefferson Company in producing Division C’s product are curren
ID: 2385223 • Letter: M
Question
Materials used by Jefferson Company in producing 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 30,000 units of material are transferred, with no reduction in Division A’s current sales.
How much would Jefferson’s total income from operations increase?
a. $60,000
b. $45,000
c. $120,000
d. $150,000
Explanation / Answer
Existing cost of Material is $10 & Var cost from Div A is $8.50. Thus There is a savings of $10-$8.50 = $1.50 pu SO Total Saving for 30000 units = 30000*$1.50 = $45000 .........Ans (b)