Question

Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the production of various paper goods.
Required: For (1) and (2) below, assume the Pulp Division can sell all of its pulp to outside customers for $25 per ton. 1. W
Reg 1 Req 2 Req3 Req 4A Req 4B Reg 5 Reg 6 What is the lowest acceptable transfer price from the perspective of the Pulp Divi
Reg 1 Reg 2 Reg 3 Reg 4A Reg 43 Reg 5 Req6 If the Pulp Division meets the price that the Carton Division is currently paying
Req 1 Req 2 Reg 3 Req 4A Req 4B Req 5 Reg 6 What is the lowest acceptable transfer price from the perspective of the Pulp Div
Rega Rogz Reg 1 Reg 2 Req3 Req 3 Req 4A Reg 4A Reg 43 Reg 43 Reg 5 Reqs Reg 6 Req6 Suppose the carton Divisions outside supp
Req 1 Req 2 Req3 Req 4A Rea43 Reg 43 Reg 5 Reas Reg 6 Rego If the Pulp Division does not meet the $20 price, what will be the
Reg 1 Rans Reg 2 Rana an Reg 3 Req 4A Rea as Reg 4B Reg 5 Refer to (4) above. If the Pulp Division refuses to meet the $20 pr
Reg 1 Reg 2 Reg 3 Req 4A Reg 43 Reg 5 Reg 6 Refer to (4) above. Assume that due to inflexible management policies, the Carton
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Answer #1

Req. 1

Pulp Division can sell all its produce to outside customer. Hence, the minimum transfer price shall be the potential loss i.e. $25. However, Carton Division is purchasing the material at $22.5 (i.e, $25 at a discount of 10%). Hence, the maximum price that Carton division will be ready to pay shall be the current purchase cost i.e. $22.50.

Therefore, there will be no acceptable range of transfer price and the manager will not agree to transfer 32,000 tons of pulp next year.

Req. 2

If Pulp division meets the price that the Carton division is currently paying to its supplier i.e. $22.50, the profit of pulp division will decrease by $80,000 ($2.5 * 32,000 tons).

However, the profits of Carton division will remain unaffected and the profits of the company will be reduced by $80,000 on an overall basis.

Req. 3

The Pulp division has a spare capacity of 42,000 tons (100,000-58,000). Hence, pulp division can transfer the spare capacity at the variable cost of production. Hence, Pulp division can transfer 32,000 units at a minimum transfer price of $15.

Carton Division is purchasing the material at $22.5 (i.e, $25 at a discount of 10%). Hence, the maximum price that Carton division will be ready to pay shall be the current purchase cost i.e. $22.50. Therefore, the acceptable transfer price range shall be $15 to $22.50. Managers are likely to voluntarily agree on the transfer price of 32,000 tons for the next year.

Req. 4(a)

If the supplier drops its price to $20 per ton, the Pulp division can meet this price because the minimum price of transfer is $15.

Req. 4(b)

If Pulp division does not meet the $20 price, the profit of the company as a whole will be reduced by $160,000 [($20 - $15) * 32,000 units]

Req. 5

Purchasing by the Carton division at a higher price from Pulp division will not affect the overall profit of the Company because on one side, it will increase the profit of the Pulp division and on the other side, increase the cost of purchases of Carton division with an equal amount.

Req. 6

If the Carton division will have to purchase 32,000 units from Pulp division at a price of $25, then profit to Pulp division will be $10 per ton ($25 - $15) and loss to Carton division will be $5 per ton ($25 - $20). Hence overall benefit to company on transfer is $5 per ton ($10 - $5).

Therefore, overall profit of the company will increase by $160,000 (32,000 units @$5 per unit)

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