Question
Division L at Reiner Ltd. manufactures 16,950 units of part #70, which it currently sells to outside customers. Selected data for part #70 are given
Division L at Reiner Ltd. manufactures 16,950 units of part #70, which it currently sells to outside customers. Selected data for part #70 are given below:
Unit selling price to outside customers | $91 | ||||
Variable production cost per unit | 58 | ||||
Variable selling and administrative expense per unit | 12 | ||||
Total fixed production cost (based on a capacity of 19,825 units per year) | $380,000 |
Division K at Reiner Ltd. currently purchases 6,575 units of part #70 from an outside supplier at a price of $85. Consideration is being given to buying internally rather than from the outside supplier. If an internal transfer takes place, it has been determined that variable S&A expense would be cut by one quarter for any sales made to Division K.
Assume the two divisions agree on a transfer price of $79. What is the incremental income to Division L if a transfer takes place?
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