Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10.00 per unit. However, the same materials are available with Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales. How much will Division A's income from operations increase

Respuesta :

Answer:

$25,000

Explanation:

The minimum transfer of price that would maximize and optimize the group profit is the relevant variable cost of production.

Any price paid by Division C to an outside supplier higher than the minimum transfer would reduce the group's profit and vice versa.

Also, a transfer price higher that the variable cost would increase the profit of the transferring Division provided it has unused capacity

Hence, Division A's profit would increase by  difference between its variable cost and the transfer price

Minimum transfer = Variable cost per unit= $8.50

Increase in Division A profit = (Transfer price - Variable cost)× units sold

              = (9.50 - 8.50) × 25,000

               =$25,000