Materials Used by Jefferson Company in Producing Division C's Product

question 39

Multiple Choice

Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10.00 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 at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales.​
-Division A's operating income will increase by

• A)$0
• B)$75,000
• C)$25,000
• D)$50,000

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Definitions:

Machine-Hours

An assessment of the level of productivity or operational activity, based on the time span machinery is active.

Sales Commissions

Payments made to sales employees as a percentage of the sales they generate.

Sales Volume

The total number of units of a product sold within a specific period.

Total Variable Cost

The entire expense that varies directly with changes in production volume, including materials, labor, and other costs that increase or decrease with output level.