Chapter 10, Problem 17E

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $1,350 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $900 per unit.

1. a. If a transfer price of $1,000 per unit is established and 75,000 units of materials are transferred, with no reduction in the Components Division’s current sales, how much would Ziegler Inc.’s total operating income increase?
2. b. How much would the Instrument Division’s operating income increase?
3. c. How much would the Components Division’s operating income increase?