Decision on transfer pricing

Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of $$268$ 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 $$222$ per unit.

Assume that a transfer price of $$255$ has been established and that $40,600$ units of materials are transferred, with no reduction in the Components Division's current sales.

a$.$ How much would XPort Industries' total income from operations increase?

$q$

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

s

$x$

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

$

d$.$ Any transfer price will cause the total income of the company to increase $,$ as long as the supplier division capacity is

$$ toward making materials for

products that are ultimately sold to the outside.

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d$.$ Consider the effect of setting a transfer price outside the acceptable range.

Learning Objective $5.$