Question

Decision on Transfer Pricing

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $319 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 $265 per unit.

a. If a transfer price of $290 per unit is established and 36,800 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Ziegler Inc.’s total operating income increase?
$

b. How much would the Instrument Division’s operating income increase?
$

c. How much would the Components Division's operating income increase?
$

Answer 1

a)	Calculation of increase in total income of Ziegler Inc.
	Amount earlier paid to outside supplier	11,739,200	(36800*319)
	Less: in-house variable manufacturing cost	9,752,000	(36800*265)
	saving and INCREASE IN Total income	1,987,200
b)	Calculation of increase in total income of Instrument Division
	Amount earlier paid to outside supplier	11,739,200	(36800*319)
	Less: in-house transferring cost	10,672,000	(36800*290)
	saving and INCREASE IN Total income	1,067,200
c)	Calculation of increase in total income of component Division
	Transfer of units to instrument decision	10,672,000	(36800*290)
	Less: in-house variable manufacturing cost	9,752,000	(36800*265)
	saving and INCREASE IN Total income	920,000