Decision on Transfer Pricing Materials used by the Truck Division of Armstrong M

Question

Decision on Transfer Pricing Materials used by the Truck Division of Armstrong Motors are currently purchased from outside suppliers at a cost of $262 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 Truck Division at a variable cost of $217 per unit. a. If a transfer price of $238 per unit is established and 25,100 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Armstrong Motors' total income from operations increase? $ b. How much would the Truck Division's income from operations increase? $ c. How much would the Components Division's income from operations increase? $

Explanation / Answer

previous price $262

current price $238

profit (262-238)=$24

so income increase per unit $24

total income increased 25100*24=$602400

b previous price =$262

current price =$217

profit=(262-217)=$45

income increase per unit-$45

total income increased $45*25100=$1129500

c components devision s income increases also the same of $1129500

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