EX 9-19 Decision on transfer pricing obj. 5 00 Materials used by the Instrument

Question

EX 9-19 Decision on transfer pricing obj. 5 00 Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of $210 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 $160 per unit. A. If a transfer price of $180 per unit is established and 60,000 units of materials are trans- ferred, with no reduction in the Components Division's current sales, how much would XPort 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?

Explanation / Answer

A Xport Industries' total income increase=60000*(210-160)= $3000000 B Instrument division's income from operations increase=60000*(210-180)= $1800000 C Component division's income from operations increase=60000*(180-160)= $1200000

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