Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for
ID: 2456926 • Letter: H
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 5,000 tons of pulp per year from a supplier at a cost of $70 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 $70 per ton.
What is the maximum Transfer Price at which Carton is willing to buy within the firm?
Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer
price for 5,000 tons of pulp next year?
If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 5,000 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?
For (3)-(6) below, assume that the Pulp Division is currently selling only 30,000 tons of pulp each year to outside customers at the stated $70 price.
What is the minimum transfer price for Pulp Division?
What is the range of transfer price the manager's of both divisions should agree?
Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer
price for 5,000 tons of pulp next year?
50,000 tons per year) 18 60 Net operating income $10
Explanation / Answer
1-a. What is the minimum Transfer Price at which Pulp is willing to sell within the firm?
Minimum Transfer Price at which Pulp is willing to sell within the firm = $ 70
Note : Minimum Transfer Price at which Pulp is willing to sell within the firm would be sell price
1-b.What is the maximum Transfer Price at which Carton is willing to buy within the firm?
Maximum Transfer Price at which Carton is willing to buy within the firm = Purchase price
Maximum Transfer Price at which Carton is willing to buy within the firm = 70-10%*70
Maximum Transfer Price at which Carton is willing to buy within the firm = $ 63
1-c.Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer
price for 5,000 tons of pulp next year?
No
2.If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 5,000 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?
The effect on the profits of the Pulp Division , profit would decrease = (70-63)*5000
The effect on the profits of the Pulp Division , profit would decrease = $ 35000
The effect on the profits of the Cartoon Division , profit would remain same
The effect on the profits of the Company whole , Profit would decrease = $ 35000
For (3)-(6) below, assume that the Pulp Division is currently selling only 30,000 tons of pulp each year to outside customers at the stated $70 price.
3a.What is the minimum transfer price for Pulp Division?
Minimum transfer price for Pulp Division = Variable Cost
Minimum transfer price for Pulp Division = $ 42
3-b.What is the range of transfer price the manager's of both divisions should agree?
The range of transfer price the manager's of both divisions should agree = $ 42 to $ 63
3-c.Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer
price for 5,000 tons of pulp next year?
Yes
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