Question

Transfer Pricing

The materials used by the Winston-Salem Division of Fox Company are currently purchased from outside suppliers at $34 per unit. These same materials are produced by Fox's Flagstaff Division. The Flagstaff Division can produce the materials needed by the Winston-Salem Division at a variable cost of $17 per unit. The division is currently producing 168,000 units and has capacity of 240,000 units. The two divisions have recently negotiated a transfer price of $24 per unit for 72,000 units.

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

Winston-Salem Division | $ |

Flagstaff Division | $ |

Answer #1

**Winston-Salem Division Income Increase =
$7,20,000**

**Flagstaff Division Income Increase =
$5,04,000**

**Winston-Salem
Division**

Increase in Winston-Salem Division’s Income from Operations = (Market Price - Transfer Price) x Units Transferred

Increase in Winston-Salem Division’s Income from Operations =
($34 - $24) x 72,000 units = **$7,20,000**

**Flagstaff
Division**

Increase in Flagstaff Division’s Income from Operations = (Transfer Price - Variable Cost per Unit) x Units Transferred

Increase in Flagstaff Division’s Income from Operations= ($24 -
$17) x 72,000 units = **$5,04,000**

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