please do requerment 2 , 3, 4, and 6. thank you 3 Problem 11A-4 Transfer Price w
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please do requerment 2 , 3, 4, and 6. thank you
3 Problem 11A-4 Transfer Price with an Outside Market [LO11-5] 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: 10 points $23 Selling price Expenses $13 Variable Fixed (based on a capacity of eBook 101,880 tons per year) 6 19 Net operating income Print Hrubec Products has just acquired a small company that manufactures paper cartons. This company will be treated as a division of ReterencesHrubec with full profit responsibility. The newly formed Carton Division is currently purchasing 29,000 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. Requlrec For( and (2) below, assume the Pulp Division can sell all of its pulp to outside customers for $23 per ton. 1. What is the lowest acceptable transfer price from the perspective of the Pulp Division? What is the highest acceptable transfer price from the perspective of the Carton Division? What is the range of acceptable transfer prices (if any) between the two divisions? Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 29,000 tons of pulp next year? 2. If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 29,000 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 62,000 tons of pulp each year to outside customers at the stated $23 price. 3. What is the lowest acceptable transfer price from the perspective of the Pulp Division? What is the highest acceptable transfer price from the perspective of the Carton Division? What is the range of acceptable transfer prices (if any) between the two divisions? Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 29,000 tons of pulp next year? 4-a. Suppose the Carton Division's outside supplier drops its price (net of the purchase discount) to only $18 per ton. Should the Pulp Division meet this price? 4-b- lf the Pulp Division does not meet the $18 price, what will be the effect on the profits of the com pany as a whole? 5. Refer to (4) above. If the Pulp Division refuses to meet the $18 price, should the Carton Division be required to purchase from the Pulp Division at a higher price for the good of the company as a whole? 6. Refer to (4) above. Assume that due to inflexible management policies, the Carton Division is required to purchase 29,000 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? Complete this question by entering your answers in the tabs below Req 2 Req 3 Req 4A Req 4B Req 5 Req 6 If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 29,000 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? 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 S 66.700Explanation / Answer
2 Effect on pulp division Normal selling price to outsiders 23 Less:Transfer price (23-10%) 20.7 Revenue lost 2.3 Units transferred 29000 Total loss 66700 No effect on carton division since transfer price=outside purchase price Company will also incur a loss of $66700 3 Lowest acceptable transfer price for Pulp division=Variable cost=$13 (Since there is idle capacity) Highest acceptable transfer price for carton divison=$20.7 Range=13-20.7 Managers of both division will agree to this transfer price voluntarly. 4-a. Yes. $18 is within the range of 13-20.7 4-b. Loss in revenue: Transfer price 18 Less:Variable cost 13 Contribution lost 5 Units transferred 29000 Total loss 145000 6 Effect on pulp division: Transfer price 23 Less:Variable cost 13 Increased Contribution 10 Effect on carton division: Transfer price 23 Outside purchase 20.7 Loss on transfer 2.3 Net effect on company=10-2.3=7.7 increase in profit Total increase in profit=29000*7.7=223300
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