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.

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 $23     Expenses:      Variable $13        Fixed (based on a capacity of
        96,000 tons per year) 6   19     Net operating income $4   2. 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? decrease a. Profits of the Pulp Division will b. Profits of the Carton Division will c. Profits of the company as a whole will decrease remain unchanged by by (69,000)

Explanation / Answer

2 Minimum Transfer Price for the carton div.= $23 - (10% of $23) =$20.70 a The profit of the pulp division would decrease by 30,000 units * ($23-$20.70) =$69,000 b. Profits of Carton Div. will remain unchanged By same price c. The profit of the company would decrease by $69,000

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