The materials used by the Winston-Salem Division of Fox Company are currently purchased from outside suppliers at $30 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

Question

The materials used by the Winston-Salem Division of Fox Company are currently purchased from outside suppliers at $30 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 $15 per unit. The division is currently producing 70,000 units and has capacity of 100,000 units. The two divisions have recently negotiated a transfer price of $22 per unit for 30,000 units. By how much will each division’s income increase as a result of this transfer?

Accepted Answer

Increase in Flagstaff (Supplying) Division’s Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred
Increase in Flagstaff (Supplying) Division’s Income from Operations = ($22 – $15) × 30,000 units = $210,000
Increase in Winston-Salem (Purchasing) Division’s Income from Operations = (Market Price – Transfer Price) × Units Transferred
Increase in Winston-Salem (Purchasing) Division’s Income from Operations = ($30 – $22) × 30,000 units = $240,000

Question 23.6: The materials used by the Winston-Salem Division of Fox Comp...

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