Materials used by the Truck Division of Armstrong Motors are currently purchased
ID: 2461677 • Letter: M
Question
Materials used by the Truck Division of Armstrong Motors are currently purchased from outside suppliers at a cost of $270 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 $224 per unit.
a. If a transfer price of $246 per unit is established and 27,400 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
Armstrong Motors Profitability Analysis Details Truck Division Component Division Armstrong Motors Total units of materials required 27,400 27,400 27,400 External Purchase cost 270 270 Intercompany Transfer Price 246 246 Variable cost of prodcution 224 224 Increase in Net Income 24 22 46 Total Increase in Net Income 657,600 602,800 1,260,400 a Total Income Increase for Armstrong Motor= $ 1,260,400 b Total Income Increase for Truck Division= 657,600 c Total Income Increase for Component Division= 602,800