The materials used by the Laramie Division of Barron Company are currently purchased
from outside suppliers at $40 per unit. These same materials are produced by
Barron’s Astoria Division. The Astoria Division can produce the materials needed by
the Laramie Division at a variable cost of $28 per unit. The division is currently producing
80,000 units and has capacity of 100,000 units. The two divisions have recently
negotiated a transfer price of $35 per unit for 20,000 units. By how much will each division’s
income increase as a result of this transfer?

BARRON COMPANY
Change in Divisional Income
Laramie Division Astoria Division

Increase (decrease) in sales $ 700,000
Less increase (decrease) in variable costs 560,000
Increase (decrease) in income $100,000 $140,000