Transfer Pricing The materials used by the Winston-Salem Division of Fox Company

Question

Transfer Pricing

The materials used by the Winston-Salem Division of Fox Company are currently purchased from outside suppliers at $34 per unit. These same materials are produced by Fox's Flagstaff Division. The Flagstaff Division can produce the materials needed by the Winston-Salem Division at a variable cost of $17 per unit. The division is currently producing 168,000 units and has capacity of 240,000 units. The two divisions have recently negotiated a transfer price of $24 per unit for 72,000 units.

By how much will each division's income increase as a result of this transfer?

Explanation / Answer

Winston-Salem Division Income Increase = $7,20,000

Flagstaff Division Income Increase = $5,04,000

Winston-Salem Division

Increase in Winston-Salem Division’s Income from Operations = (Market Price - Transfer Price) x Units Transferred

Increase in Winston-Salem Division’s Income from Operations = ($34 - $24) x 72,000 units = $7,20,000

Flagstaff Division

Increase in Flagstaff Division’s Income from Operations = (Transfer Price - Variable Cost per Unit) x Units Transferred

Increase in Flagstaff Division’s Income from Operations= ($24 - $17) x 72,000 units = $5,04,000

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