Materials used by the Instrument Division of Dart Industries are currently purch

Question

Materials used by the Instrument Division of Dart Industries are currently purchased from outside suppliers at a cost of $180 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 Instrument Division at a variable cost of $125 per unit. a. If a transfer price of $145 per unit is established and 40,000 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Dart Industries' total income from operations increase? b. How much would the Instrument Division s income from operations increase? c. How much would the Components Division's income from operations increase?

Explanation / Answer

A./

PROFIT OF COMPONENT DIVISION FROM SELLING OF 40000 UNITS

($145 - $125) * 40000

SAVING OF MATERIAL COST IN INSTRUMENT DIVISION

($180 - $145) * 40000

B./

INCEREASE IN INSTRUMENT DIVISION'S INCOME FROM OPERATION IS $1400000

C./

INCEREASE IN COMPONENTS DIVISION'S INCOME FROM OPERATION IS $800000

DESCRIPTION AMOUNT $

PROFIT OF COMPONENT DIVISION FROM SELLING OF 40000 UNITS

($145 - $125) * 40000

$800000

SAVING OF MATERIAL COST IN INSTRUMENT DIVISION

($180 - $145) * 40000

$1400000 INCEREASE IN TOTAL INCOME $2200000

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