Problem:
A company has two divisions, the Selling Division and the Buying Division. The Selling Division manufactures an intermediate product and then "sells" them to the Buying Division, which completes the product and sells the final product to retailers. The market price for the Buying Division to purchase one unit of the intermediate product is $20. Fixed costs assume 100,000 units.
Unit costs for the intermediate product of the Selling Division are: Direct materials $4
Direct labor $3
Variable overhead $2
Division fixed costs $1
Unit costs for the final product of the Buying Division (excluding the intermediate product) are: Direct materials $5
Direct labor $1
Variable overhead $1
Division fixed costs $9
Assume the transfer price for the intermediate product is 180% of full costs of the Selling Division and 100,000 units are produced and transferred to the Buying Division. If the Buying Division sells 100,000 units of the final product at a price of $60 to outside customers, what is the operating income of both divisions together?
a) $4,400,000
b) $3,400,000
c) $3,000,000
d) indeterminable