Materials used by the Layton Company Division 1 are currently purchased from out
ID: 2474958 • Letter: M
Question
Materials used by the Layton Company Division 1 are currently purchased from outside supplier at $58 per unit. Division 2 is able to supply Division 1 with 22,000 units at a variable cost of $46 per unit. The two divisions have recently negotiated a transfer price of $50 per unit for the 20,000 units.
Required:
By how much will each division's income increase as a result of this transfer?
Materials used by the Layton Company Division 1 are currently purchased from outside supplier at $58 per unit. Division 2 is able to supply Division 1 with 22,000 units at a variable cost of $46 per unit. The two divisions have recently negotiated a transfer price of $50 per unit for the 20,000 units.
Required:
By how much will each division's income increase as a result of this transfer?
Division 1 $ Division 2 $Explanation / Answer
Particulars
Amount
Division 1
Cost of Purchase from outside
58 x 20,000
$ 1,160,000
Less: Cost of Purchase from Local
50 x 20,000
$ (1,000,000)
Saving from purchasing internally
$ 160,000
Hence Increase in income
$ 160,000
Particulars
Amount
Division 2
Sale Proceeds internal sales
50 x 20,000
$ 1,000,000
Less: Variable cost of producing
46 x 20,000
$ (920,000)
Hence Increase in income
$ 80,000
Total Company Income
$ 240,000
Particulars
Amount
Division 1
Cost of Purchase from outside
58 x 20,000
$ 1,160,000
Less: Cost of Purchase from Local
50 x 20,000
$ (1,000,000)
Saving from purchasing internally
$ 160,000
Hence Increase in income
$ 160,000