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Transfer Pricing The materials used by the North Division of Horton Company are currently purchased from...

Transfer Pricing

The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $70 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 $37 per unit. The division is currently producing 91,000 units and has capacity of 130,000 units. The two divisions have recently negotiated a transfer price of $56 per unit for 39,000 units.

By how much will each division's income increase as a result of this transfer?

South Division $
North Division $
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Answer #1

Answer:-South Division income will increase by $741000.

South division variable cost per unit =$37 per unit

South division charged transfer price from North Division =$56 per unit

Income will increase by $19 per unit (ie-$56-37) on 39000 units= $741000

Spare capacity =130000 units-$91000 units =39000 units

North Division income will increase by $546000

North division currently purchase price from outside market =$70 per unit

North division offer transfer price to South Division =$56 per unit

Income will increase by $14 per unit (ie-$70-56) on 39000 units= $546000

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