Materials used by Company X in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. But the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit.
a. If a transfer price of $25 per unit is established and 60,000 units of material are transferred with no reductions in Division B's current sales, how much would Company X's total income from operations increase?
b. How much would the income from operations of Division A increase?
c. How much would the income from operations of Division B increase?
d. If the negotiated price approach is used, what would be the range of acceptable transfer prices?