Materials used by the Truck Division of Armstrong Motors are currently purchased
ID: 2460858 • Letter: M
Question
Materials used by the Truck Division of Armstrong Motors are currently purchased from outside suppliers at a cost of $388 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 $322 per unit. Assume that a transfer price of $369 has been established and that 40,200 units of materials are transferred, with no reduction in the Components Division's current sales. a. 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
a)Increase in income of armstrong motors = (388 -322 ) * 40200 = 2653200
b) Increase in income of truck division = (388- 369) *40200 = 763800
c)Increase in income of component division =(369 -322 )*40200= 1889400