Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for

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:

Sssume that the Pulp Division is currently selling only 30,000 tons of pulp each year to outside customers at the stated $70 price.

Suppose that the Carton Division's outside supplier drops its price (net of the purchase discount) to only $59 per ton.

How much potential profit will the Pulp Division lose if the $59 price is not met?

Refer to Requirement 4 above. Assume that due to inflexible management policies, the Carton Division is required to purchase 5,000 tons of pulp each year from the Pulp Division at $70 per ton. What will be the effect on the profits of the company as a whole?

Profits of the Carton Division willdecrease by:

Profits of the company as a whole will increase by:

Sssume that the Pulp Division is currently selling only 30,000 tons of pulp each year to outside customers at the stated $70 price.

Explanation / Answer

Hi, Please find calculations below: Contribution Margin if $ 59 is achieved: Price per ton $59 Less variable costs 42 Contribution margin per ton $17 Profits would have increased by 85000 85,000 in potential profits applies to the Pulp Division and to the company as a whole. This amount of 85000 will be treated as loss. Part The Pulp Division will have an increase in profits: Selling price 70 Less variable costs 42 Contribution margin per ton 28 5,000 tons × 28 per ton = 140,000 increase in profits The Carton Division will have a decrease in profits: Internal Purchase Price 70 Outside purchase price 59 Increased cost per ton 11 5,000 tons × 11 per ton = 55,000 decrease in profits The company as a whole will have an increase in profits: Increased contribution margin in the Pulp Division 28 Decreased contribution margin in the Carton Division 11 Increased contribution margin per ton 17 5,000 tons × 17 per ton = 85,000 increase in overall profits for the company. Thanks, Aman

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