Problem
Materials used by Bristol Company in producing Division C's product are currently purchased from outside suppliers at a cost of $20 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C. The Division C's manufacturing cost to produce the material include: Direct Labor of $6, Direct Materials of $8, Factory Overhead of $7 (including fixed factory overhead of $4). A transfer price of $19 per unit is negotiated and 60,000 units of material are transferred, with no reduction in Division A's current sales.
a) How much would Division C's income from operations increase (decrease)?
b) How much would Division A's income from operations increase (decrease)?
c) How much would Bristol Company's income from operations increase (decrease)?