Based on Dart Industries’ data in Exercise assume that a transfer price of $ 158 has been established and that 40,000 units of materials are transferred, with no reduction in the Components Division’s current sales.
In Exercise Materials used by the Instrument Division of Dart Industries are currently purchased from outside suppliers at a cost of $ 180 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 $ 125 per unit.
a. How much would Dart 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?
d. If the negotiated price approach is used, what would be the range of acceptable transfer prices and why?