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:

For Requirement 3 through 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.

For Requirement 3 through 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.

a) 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?

For Requirement 3 through 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.

For Requirement 3 through 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.

Requirement 3:

a) What is the minimum transfer price for Pulp Division?

b)

What is the range of transfer price the manager's of both divisions should agree?

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?

Explanation / Answer

Hi, Please find calculations below: Part A: Minimum transfer price for the pulp division is $ 42 (variable cost). This is because it has idle capacity and any kind of internal transfer to carton division will not impact its normal sales. Part B: Carton Division can buy pulp from an outside supplier for $63 a ton. It will not be interested in paying anything more than that. Since $ 42 will not impact pulp division' s normal sales and carton division will not pay anything more than $ 63, managers can mutually for a price within the range of $ 42 - $ 63. Part C: It should not be made mandatory for carton division to buy internally. It should be allowed to purchase from outside if it can avail better prices. Thanks, Aman

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