Materials used by the Truck Division of Armstrong Motors are currently purchased
ID: 2504815 • Letter: M
Question
Materials used by the Truck Division of Armstrong Motors are currently purchased from outside suppliers at a cost of $248 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 $206 per unit.
a. If a transfer price of $226 per unit is established and 40,500 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?
$
Please tell me how you get each value! I want to be able to know how to do these problems.Thank you.
Explanation / Answer
a)
it will be units*(initial purchase price -variable cost )
= 40,500*(248 - 206)
=1701,000
b) it will be units*(initial purchase price - transfer price )
= 40,500*(248 - 226)
=891,000
c) it will be units*(transfer price - variable cost)
= 40,500*(226 - 206)
=810,000