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:

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

Required:

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

Selling price Expenses: Variable $23 $13 Fixed (based on a capacity of 96,000 tons per year) 6 19 Net operating income $4

Explanation / Answer

Answer 1-a. Hurbec Products - Pulp Division had no idle capacity Transfer Price ? Variable Cost + (Total Contribution Margin on Lost Sales / No. of Units Transferred) Transfer Price ? $13 + ($300,000 / 30,000 tons) Transfer Price ? $13 + $10 Transfer Price ? $23 Contribution Margin Lost = 30,000 Tons X ($23-$13) = $300,000 Threfore, Minimum Transfer Price = $23 Answer 1-b. Maximum Transfer price Pulp Division is ready to pay = Price paid to outside Supplier Maximum Transfer price Pulp Division is ready to pay = $23 - 10% of $23 (Trade Discount) Maximum Transfer price Pulp Division is ready to pay = $20.70 per ton Answer 1-c. No, Managers of Carton and Pulp division will not voluntary agree to transfer price of 30,000 tons of pulp in the next year. Answer 2. Effect on Profits : Transfer Price to Pulp Division - 30,000 Tons X $20.70          621,000 Selling Price to Outside Customers - 30,000 Tons X $23          690,000 Increase (Decrease) in Net Income          (69,000) As per Chegg Guidelines, you can ask 1 question having 4 sub-parts. For other parts, Please ask it again.

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