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 uni for 72,000 units. By how much will each division's income increase as a result of this transfer? South Division North Division
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 uni for 72,000 units. By how much will each division's income increase as a result of this transfer? South Division North Division
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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Transcribed Image Text: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 $88 per unit
for 72,000 units.
By how much will each division's income increase as a result of this transfer?
South Division
North Division
Expert Solution
Step 1 North Division
| Particulars | Amount ($) |
| Current Price per unit at which the units are bought from outside market | 96 |
| Transfer Price offered | 88 |
| Net savings if bought from the other division | 12 |
| Units Bought | 72000 units |
| Total Savings of North Division | 864000 |
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