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: $24 Selling price Expenses: $14 Variable Fixed (based on a capacity of 6 20 s 4 99,000 tons per year) Net operating income 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 $24 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

Explanation / Answer

1 Lowest acceptable transfer price for Pulp division=Variable cost+Contribution lost=$14+[(24-14)*30000]/30000=$14+10=$24. Highest acceptable transfer price for carton divison=$24-(24*10%)=$21.60 Range=24-21.60 Managers of both division will not agree to this transfer price voluntarly. 2 Effect on pulp division Normal selling price to outsiders 24 Less:Transfer price 21.6 Revenue lost 2.4 Units transferred 30000 Total loss 72000 No effect on carton division since transfer price=outside purchase price Company will also incur a loss of $72000 3 Lowest acceptable transfer price for Pulp division=Variable cost=$14 (Since there is idle capacity) Highest acceptable transfer price for carton divison=$21.60 Range=14-21.60 Managers of both division will agree to this transfer price voluntarly. 4-a. Yes. $19 is within the range of 14-21.60 4-b. Loss in revenue: Transfer price 19 Less:Variable cost 14 Contribution lost 5 Units transferred 30000 Total loss 150000 5 No.paper carton division will be treated as a division with full profit responsibility. No need to accept higher prices 6 Effect on pulp division: Transfer price 24 Less:Variable cost 14 Increased Contribution 10 Effect on carton division: Transfer price 24 Outside purchase 21.6 Loss on transfer 2.4 Net effect on company=10-2.4=7.6 increase in profit Total increase in profit=30000*7.6=228000

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