Chapter $24-$ Homework $2$

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Decision on transfer pricing

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $$447$ per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $$371$ per unit.

a$.$ If a transfer price of $$407$ per unit is established and $28,300$ units of materials are transferred, with no reduction in the Components Division's current sales, how much would Ziegler Inc.$\text{'}$s total operating income increase?

$ $x$

b$.$ How much would the Instrument Division's operating income increase?

$ $x$

c$.$ How much would the Components Division's operating income increase?

$ $x$

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a$-$c$.$ Determine what "difference" should be computed for each part. Is it the difference between the transfer price and variable cost, or the market price and variable cost, or the market price and transfer cost. Then, multiply the difference by the units transferred.