The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $60 per unit

The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $60 per unit. These same materials are produced by Horton’s South Division. The South Division can produce the materials needed by the North Division at a variable cost of $42 per unit. The division is currently producing 200,000 units and has capacity of 250,000 units. The two divisions have recently negotiated a transfer price of $52 per unit for 30,000 units. By how much will each division’s  income increase as a result of this transfer?

Answer:


Increase in South (Supplying) 
(Transfer Price – Variable Cost per Unit) 
Division’s Income from Operations  = 

× Units Transferred 
Increase in South (Supplying) 
Division’s Income from Operations  = 
($52 – $42) × 30,000 units = $300,000 
Increase in North (Purchasing) 
Division’s Income from Operations  = 
(Market Price – Transfer Price) 
× Units Transferred 
Increase in North (Purchasing) 
Division’s Income from Operations  =  ($60 – $52) × 30,000 units = $240,000