PLEASE ANSWER QUESTIONS 1,2,4B &6. Hrubec Products, Inc., operates a Pulp Divisi

Question

PLEASE ANSWER QUESTIONS 1,2,4B &6.

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 selling price Expenses: $23 Variable Fixed (based on a capacity of $14 104,000 tons per year) 6 20 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 31,000 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. Requirecd For (1) 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 31,000 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 31,000 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?

Explanation / Answer

1) the lowest acceptable transfer price on the perspective of Pulp division is variable cost and contribution lost per unit of lost sales. The lowest acceptable transfer price is calculated as follows:-

The highest acceptable transfer price from the perspective of Carton Division will be the price it paid to outside supplier currently (i.e. $23 less 10% discount of $2.30) = $23-$2.30 = $20.7

There will be no mutually agreeable transfer price because the Carton division won't pay more than $20.7 and The Pulp division would not accept less than $23. Therefore there is not a range of acceptable transfer price and the managers are not likely to voluntarily agree to a transfer price for 31,000 tons of pulp next year.

2) Effect on the profits (Amount in $)

Profits of Carton division will remain unchanged because it pays the same price of $20.70 per ton in both the situations.

4B) If the Pulp division does not meet the price of $19 then the profit of the company will decrease by $155,000 [($19-$14)*31,000]. As the company's variable cost of producing cartons is $14 and the purchase price from outside is $19.

6) The company as a whole will have a decrease in profit by $279,000 [($23-$14)*31,000]

Variable cost per unit 14 Add: Contribution lost per unit [(23-14)*31,000]/31,000 9 The minimum acceptable transfer price 23

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