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: $ 20 Selling price Expenses: Variable Fixed (based on a capacity of 102,000 tons per year) Net operating income 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 30,000 tons of pulp per year from a supplier at a cost of $20 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 $20 per ton. 1-a. What is the minimum Transfer Price at which Pulp is willing to sell within the firm? Transfer price > 1-b. What is the maximum Transfer Price at which Carton is willing to buy within the firm? (Round your answer to 2 decimal places.) Maximum transfer price

Answer 1

Lowest Acceptable transfer price for Pulp Division = $20 i.e.Selling Price to outside customers

Highest Acceptable transfer price for Carton Division = $20*0.9 = $18 (current purchase price)

No Acceptable Range

Not likely to Agree

2.Effect on pulp Division:

Loss on 29,000 tons = (20-18)*30,000 = $60,000

Profits of pulp division will decrease by $60,000

Carton Division = No effect (same price as before)

Company as a whole = Loss of $60,000

i.e. profits will decrease by $60,000

3.Space Capacity Exists

Lowest Acceptable transfer price = Variable Cost = $10

Highest Acceptable Transfer Price for Carton Division = $20*0.9 = $18 (current purchase price)

Range of acceptable transfer price = $10-$18

Yes, they are likely to voluntarily agree

4a – The price is still higher than the variable cost to the pulp division, it should meet this price.

4b Effect on profits of the company is equal to loss of $5 per ton

=30,000*$5 = loss of $150,000

i.e. profits will reduce by $150,000

5. The carton division can accept a higher price for the good of the company as a whole

6. Effect on profits of the company:

Increase in profits of pulp division = 30,000*(20-10) = $300,000

Loss of Carton Division = 30,000*(20-15) = $150,000

Net benefit to the company = $150,000

Hence, profits will increase by $150,000