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Decision on Transfer Pricing
Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $346 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $287 per unit.
Assume that a transfer price of $329 has been established and that 36,500 units of materials are transferred, with no reduction in the Components Division's current sales.
Question 1: How much would T_Kong Industries' total income from operations increase?
Question 2: How much would the Instrument Division's income from operations increase?
Question 3: How much would the Components Division's income from operations increase?
Question 14: Any transfer price will cause the total income of the company to increase , as long as the supplier division capacity is used toward making materials for products that are ultimately sold to the outside.
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