Dual Price Transferring:

The Athens Company has two divisions, Alpha and Delta. Delta Division produces a product at a variable cost of $12 per unit, and sells 200,000 units to outside customers at $20 per unit and 60,000 units to Alpha Division at variable cost plus 50%. Under the dual transfer price system, Alpha Division pays only the variable cost per unit. Delta Divisions fixed costs are $575,000 per year. Alpha Division sells 60,000 units of its finished product to outside customers at $40 per unit. Alpha has variable costs of $11 per unit, in addition to the costs from Delta Division. Alpha Divisions annual fixed costs are $380,000. There are no beginning or ending inventories.

Required: A. 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.