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 

Materials used by the Instrument Division of Dart Industries are currently purchased from outside suppliers at a cost of $180 per unit

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?


Answer:













a. Increase in Dart Industries’ Market Variable Cost Unit 
 Income from Operations =  Price –  per Unit × Transferred 
$2,200,000 = ($180 –  $125) × 40,000 

b. 

Increase in the Instrument Division’s 
Income from Operations 

= 


Market 
Price 

– 


Transfer 
Price 

× 

Unit 
Transferred 
 $1,400,000 = ($180 –  $145) × 40,000 

c. 

Increase in the Components Division’s 
Income from Operations 

= 
  
Transfer 
Price 

– 


Variable Cost 
per Unit 

× 

Unit 
Transferred 
 $800,000 = ($145 –  $125) × 40,000