Question

Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the production of various paper goods. Revenue and costs associated with a ton of pulp follow:

  

Selling price		$24
Expenses:
Variable	$14
Fixed (based on a capacity of         100,000 tons per year)	6	20
Net operating income		$4

  

Hrubec Products has just acquired a small company that manufactures paper cartons. This company will be treated as a division of Hrubec with full profit responsibility. The newly formed Carton Division is currently purchasing 32,000 tons of pulp per year from a supplier at a cost of $24 per ton, less a 10% purchase discount. Hrubec’s president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if an acceptable transfer price can be worked out.

  

Required:

For (1) and (2) below, assume that the Pulp Division can sell all of its pulp to outside customers for $24 per ton.

  

1-a.	What is the minimum transfer price for Carton Division?

       

1-b.	What is the maximum transfer price that Pulp Division is ready to pay? (Round your answer to 2 decimal places.)

       

1-c.	Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 32,000 tons of pulp next year?
	No Yes

2.	If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 32,000 tons of pulp to the Carton Division each year, what will be the effect on the profits of the Pulp Division, the Carton Division, and the company as a whole?

      

For (3)-(6) below, assume that the Pulp Division is currently selling only 59,000 tons of pulp each year to outside customers at the stated $24 price.

3a.	What is the minimum transfer price for Pulp Division?

        

3-b.	What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.)

       

3-c.	Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 32,000 tons of pulp next year?
	Yes No

4-a.	Suppose that the Carton Division’s outside supplier drops its price (net of the purchase discount) to only $19 per ton. Should the Pulp Division meet this price?
	Yes No

4-b.	How much potential profit will the Pulp Division lose if the $19 price is not met?

        

5.	Refer to (4) above. If the Pulp Division refuses to meet the $19 price, should the Carton Division be required to purchase from the Pulp Division at a higher price for the good of the company as a whole?
	Yes No

6.	Refer to (4) above. Assume that due to inflexible management policies, the Carton Division is required to purchase 32,000 tons of pulp each year from the Pulp Division at $24 per ton. What will be the effect on the profits of the company as a whole?

     

Answer 1