The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit

The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the  Multinomah Division at a variable cost of $75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of $82 per unit for 15,000 units. By how much will each division’s income increase as a result of this transfer?

Answer:

Increase in Pembroke (Supplying) 

Division’s Income from Operations  = 

(Transfer Price – Variable Cost per Unit) 

× Units Transferred 

Increase in Pembroke (Supplying) 

Division’s Income from Operations  = 

($82 – $75) × 15,000 units = $105,000 

Increase in Multinomah (Purchasing) 

Division’s Income from Operations  = 

(Market Price – Transfer Price) 

× Units Transferred 

Increase in Multinomah (Purchasing) 

Division’s Income from Operations  =  ($90 – $82) × 15,000 units = $120,000