The Athens Company has two divisions, Alpha and Delta. Delta Division produces a product at a variable cost of \($7\) per unit, and sells 150,000 units to outside customers at \($12\) per unit and 40,000 units to Alpha Division at variable cost plus 40 percent. Under the dual transfer price system, Alpha Division pays only the variable cost per unit. Delta Division’s fixed costs are \($275,000\) per year. Alpha Division sells its finished product to outside customers at \($25\) per unit. Alpha has variable costs of \($5\) per unit, in addition to the costs from Delta Division. Alpha Division’s annual fixed costs are \($180,000\). There are no beginning or ending inventories.

Required

a. Prepare the income statements for the two divisions and the company as a whole.

b. Why is the income for the company less than the sum of the profit figures shown on the income statements for the two divisions? Explain.