Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that si

Question

Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that silver could use in its production. Silver currently is purchasing 50,000 units from an outside supplier for $25. Gold is operating at less than full capacity and has variable costs of $13.50 per unit. The full cost to manufacture the unit is $20. Gold currently sells 450,000 units at a selling price of $27. If an internal transfer is made, variable shipping and administrative costs of $1 per unit could be avoided. How much profit will Gold receive from the transfer if a transfer price of $22.50 is agreed upon?

Explanation / Answer

Profit from the transfer for Gold = 50000*(22.5-12.5) = $500000

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