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 $440 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 $365 per unit. Assume that a transfer price of $418 has been established and that 43,400 units of materials are transferred, with no reduction in the Components Division's current sales a. 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

a)

it will be units*(initial purchase price -variable cost )

= 43,400*(440 - 365)

=4513600

b) it will be units*(initial purchase price - transfer price )

= 43400* (440- 418)

=954800

c) it will be units*(transfer price - variable cost)

= 43400 *(418 - 365)

= 2300200

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