The materials used by the Multinomah Division of Isbister Company are currently purchased from outside

The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the  Multinomah Division at a variable cost of $75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of $82 per unit for 15,000 units. By how much will each division’s income increase as a result of this transfer?

Answer:

Increase in Pembroke (Supplying) 

Division’s Income from Operations  = 

(Transfer Price – Variable Cost per Unit) 

× Units Transferred 

Increase in Pembroke (Supplying) 

Division’s Income from Operations  = 

($82 – $75) × 15,000 units = $105,000 

Increase in Multinomah (Purchasing) 

Division’s Income from Operations  = 

(Market Price – Transfer Price) 

× Units Transferred 

Increase in Multinomah (Purchasing) 

Division’s Income from Operations  =  ($90 – $82) × 15,000 units = $120,000