Materials used by the Truck Division of Armstrong Motors are currently purchased
ID: 2455630 • Letter: M
Question
Materials used by the Truck Division of Armstrong Motors are currently purchased from outside suppliers at a cost of $339 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 Truck Division at a variable cost of $281 per unit.
a. If a transfer price of $308 per unit is established and 45,900 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Armstrong Motors' total income from operations increase? $
b. How much would the Truck Division's income from operations increase? $
c. How much would the Components Division's income from operations increase? $
Explanation / Answer
Solution:
a.
b.
c.
Increase in income of Armstrong's Motors Transfer price sale 14,137,200 Less: Variable cost - 281 * 45,900 12,897,900 Profit on transferring the unit 1,239,300 Add: Saving in extra cost paid to supplier - $ 339 - $ 308 * 45,900 1422900 Increase income 2,662,200