Transfer PricingThe materials used by the North Division of Zhang Company are currently purchased from outside suppliers at $96 per unit. These same materials areproduced by Zhang's South Division. The South Division can produce the materials needed by the North Division at a variable cost of $79 per unit. Thedivision is currently producing 630,000 units and has capacity of 750,000 units. The two divisions have recently negotiated a transfer price of $88 per unitfor 72,000 units.By how much will each division's income increase as a result of this transfer?South Division$ 648,000 vNorth Division$ 864,000 x

Answered: The materials used by the North…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 6BE

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Transfer Pricing
The materials used by the North Division of Zhang Company are currently purchased from outside suppliers at $96 per unit. These same materials are
produced by Zhang's South Division. The South Division can produce the materials needed by the North Division at a variable cost of $79 per unit. The
division is currently producing 630,000 units and has capacity of 750,000 units. The two divisions have recently negotiated a transfer price of $88 per unit
for 72,000 units.
By how much will each division's income increase as a result of this transfer?
South Division
$ 648,000 v
North Division
$ 864,000 x

Expert Solution

Step 1

Transfer Pricing- Transfer price is a price on which two parties are agreed on transfer goods or services. For example- when two division are in an entity , one division produce those goods which are required by other division, then these two division agreed on a fixed prices on which they can transfer their goods.

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