Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $290 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 $241 per unit.a.  If a transfer price of $264 per unit is established and 39,200 units of materials are transferred, with no reduction in the Components Division’s current sales, how much would T_Kong Industries’ total income from operations increase?$b.  How much would the Instrument Division’s income from operations increase?$c.  How much would the Components Division’s income from operations increase?$

Question
Asked Mar 23, 2020
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Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $290 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 $241 per unit.

a.  If a transfer price of $264 per unit is established and 39,200 units of materials are transferred, with no reduction in the Components Division’s current sales, how much would T_Kong Industries’ total income from operations increase?
$

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

c.  How much would the Components Division’s income from operations increase?
$

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Expert Answer

Step 1

Cost accounting is the branch of accounting that inspects the cost structure of a business. This branch deals with gathering data about the expenses incurred by the activities of the organization and assigning the cost to various products and services. 

Step 2

a. To calculate the increase in TK industries total income from operations:

Increase in income from operations= Total purchase cost –Total variable cost

                                                        = ($290 × 39,200) - ($241 × 39,200)          

                                                        = $11,368,000 - $9,447,200

                                                        =$1,920,800

b. To calculate the increase in income from operations of instrument division:

     Increase in income from operations= Total purchase cost – Total transfer price

                                                        = ($290 × 39,200) - ($264 × 39,200)          

               ...

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