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:

$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 30,000 tons of pulp per year from a supplier at a cost of $23 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."

For Requirement 1 through 2 below, assume that the Pulp Division can sell all of its pulp to outside customers for $23 per ton.

What is the minimum transfer price for Pulp Division? Minimum transfer price $______________

What is the maximum transfer price that Carton Division is ready to pay? Maximum transfer price $_________

If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 30,000 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?

What is the minimum transfer price for Pulp Division? Minimum transfer price $___________

What is the range of transfer price the manager's of both divisions should agree? From $________ to $_______

How much potential profit will the Pulp Division lose if the $18 price is not met? Profit of the comapny will decrease by $______________

Refer to Requirement 4 above. Assume that due to inflexible management policies, the Carton Division is required to purchase 30,000 tons of pulp each year from the Pulp Division at $23 per ton. What will be the effect on the profits of the company as a whole?

A. The Pulp Division will have an increase in profit by $__________

B. The Carton Division will have a decrease in profit by $________

C. The company as a whole will have an increase in profit by $__________.

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:

Explanation / Answer

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1. a. Since pulp division can sell all its pulp outside @ 23 and carton can buy it at 10% discount ie 23-2.30 = 20.70, thus, transfer price should be 23 and the caton division should buy from outside. b. Max. transfer price which cartton will pay = 20.70. 2. a. Profis of pulp division will decrease 2.30*30000 = 69000 b. Profits of carton remain unchanged. c. Profits of whole co. decrease by 69000. 3. Spare Capacity in pulp division 40000 Requiremnt of carton division 30000 So, pulp will charge only variable cost due to spare capacity available Hnce, Transfer price = 13. Range will be 13-20.70

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