Decision on Transfer Pricing

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $410 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 $340 per unit.

Assume that a transfer price of $390 has been established and that 31,200 units of materials are transferred, with no reduction in the Components Divisions current sales.

a. How much would Ziegler Inc.s total operating income increase? $fill in the blank 1

b. How much would the Instrument Divisions operating income increase? $fill in the blank 2

c. How much would the Components Divisions operating income increase? $fill in the blank 3

d. Any transfer price will cause the total income of the company to increase , as long as the supplier division capacity is used toward making materials for products that are ultimately sold to the outside.