3 Problem 11A-4 Transfer Price wlth an Outslde Market [LO11-5] 10 points Hrubec
ID: 2579335 • Letter: 3
Question
3 Problem 11A-4 Transfer Price wlth an Outslde Market [LO11-5] 10 points 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: $23 Selling price Expensers 513 Variable Fixed (based on a capacity of Book 1e1,eee tons per year) 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 peryear 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. Required: 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 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 If the Pulp Division does not meet the $18 price, what will be the effect on the profits of the company 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 CartnDivision 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 1 Req 2 Req 3 Req 4A Req 4B Req 5 Req 6 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? (Round "Maximum transfer price" answer to 1 decimal place.)Explanation / Answer
1.
Since the company(pulp division) is operating at fully capacity i.e it can sell all of its pulp to outside customer, its minimum acceptable transfer price would be $ 23 per ton.
Carton divsion maximum accpetable transfer price would be the price it pays to outside supplier i.e
23 - .1 X 23 = 20.7
No managers of carton and pulp division wont agree to the transfer price it offers to each other.
2.
Pulp division profit will decrease by 2.3 per tonne, total decrease in profit = 29000 X 2.3 = 66700
Cartoon division profit will not get affected since its will continue to get the pulp on same price.
company profit will decrease by rs 66700.
3.
Due to spare capacity lowest acceptable transfer price from the perspective of pulp division would be its variable cost i.e $ 13 per tonne.
Carton divsion maximum accpetable transfer price would be the price it pays to outside supplier i.e
23 - .1 X 23 = 20.7
Range between two division = 13 -20.7
Yes managers are likely to agree voluntairly to a tranfer price.
4a. yes the pulp divsion should meet th price of $ 18. Pulp division has spare capacity of 39000 tonne (101000 - 62000 tonne). So it can tranfer 29000 tonne to cartoon division at variable cost of rs 13. Fixed cost is not relevant ,it is a sunk cost which will continue to incur at the same level till 101000 tonne capacity.
4b . If pulp division refuses to transfer at 18 , company profits will not affected. however profits of divsions will be affected.
5. yes cartoon division should continue to purchase from pulp division for the good of company.
6. There will be no effect on overall company's profits. However, there will be a loss and gain(extra) of $ 2.3 per tonne to cartoon divsion and pulp divsion.
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