Obj. 5 Materials used by the Instrument Division of T_Kong Industries are curren
ID: 2409628 • Letter: O
Question
Obj. 5 Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $175 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 $122 per unit a. If a transfer price of $148 per unit is established and 50,000 units of materials are transferred, with no reduction in the Components Division's current sales, how much would T Kong Industries' total income from operations increase? Answer b. How much would the Instrument Division's income from operations increase? c. How much would the Components Division's income from operations increase?Explanation / Answer
a.
Total income of industry increases if the payment to suppliers is stopped by the reduction of internal variable cost.
Increasing income of industry = (Suppliers’ cost per unit – Variable cost per unit) × Units
= (175 – 122) × 50,000
= $53 × 50,000
= $2,650,000 (Answer)
b.
Income increases in the inst division by the difference of suppliers’ cost and transfer price from the comp division.
Increasing income of inst = (Suppliers’ cost per unit – Transfer price per unit) × Units
= (175 – 148) × 50,000
= $27 × 50,000
= $1,350,000 (Answer)
c.
Income increases in the comp division by the difference of transfer price to inst division and the variable cost per unit
Increasing income of comp = (Transfer price per unit – Variable cost per unit) × Units
= (148 – 122) × 50,000
= $26 × 50,000
= $1,300,000 (Answer)
Checking for correct Answer:
The above answers are correct if (b + c = a). Therefore, (1,350,000 + 1,300,000 = 2,650,000) correct.
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