The materials used by the North Division of Horton Company are currently purchased from outside suppliers

The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $60 per unit. These same materials are produced by Horton’s South Division. The South Division can produce the materials needed by the North Division at a variable cost of $42 per unit. The division is currently producing 200,000 units and has capacity of 250,000 units. The two divisions have recently negotiated a transfer price of $52 per unit for 30,000 units. By how much will each division’s  income increase as a result of this transfer?

Answer:


Increase in South (Supplying) 
(Transfer Price – Variable Cost per Unit) 
Division’s Income from Operations  = 

× Units Transferred 
Increase in South (Supplying) 
Division’s Income from Operations  = 
($52 – $42) × 30,000 units = $300,000 
Increase in North (Purchasing) 
Division’s Income from Operations  = 
(Market Price – Transfer Price) 
× Units Transferred 
Increase in North (Purchasing) 
Division’s Income from Operations  =  ($60 – $52) × 30,000 units = $240,000