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: 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. 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 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? For (3)-(6) below, assume that the Pulp Division is currently selling only 65,000 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 31,000 tons of pulp next year?

Explanation / Answer

Hrubec Products Inc Requirement 1 No, There does not exist range of acceptable transfer prices. No, Managers are not likely to voluntarily agree to transfer price for 31000 tons pulp next year The reason for above negetive answers is very logical. Cartoon division can procure pulp at $23 less 10% discount while pulp division can sell it at $23. The two opposite view are not likely to be agreed. Reqirement 2 Pulp Division Cartoon division Company as whole profit of cartoon division will not be affected So Profit of the company will be affected by Sales in Units 31000 Selling price to cartoon division 20.7 Selling pricefor outsider 23 Difference in selling price 2.3 Total contirbution lost due to sales to cartoon division 71300 Profit will decline by 71300 0 71300 Requirement 3 Yes,.There exist range of acceptable transfer prices. Managers are likely to voluntarily agree to transfer price for 31000 tons pulp next year Lowest range from perspective of Pulp division is $15.11 i.e. variable cost of pulp division & unrecovered fixed expenses. Variable cost 14 unrecovered fixed cost =(104000*6)-(65000*9) 39000 Cartoon division requirement 35000 1.11 15.11 Highest range from perspective of Cartoon division is $ 20.7 as this is the cost Cartoon division is paying currently Requirement 4 If, Pulp division refused to accept the transfer price of 19 then profit of the company as whole will decline by 83700 i.e. Extra cost of pulp paid by cartoon division to ousiders =31000*(21.7-19) As per policy of chegg we can answer maximum of 4 sub-parts of question. Thank You

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.