division manufactures electronic circuit
Problem 11A-4 Transfer Price with an Outside Market LO11-5) Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the production of varous paper goods Revenue and costs associated with a ton of pulp follow Selling price Expenses: $22 Varlable Fixed (based on a capacity of $13 99,088 tons per year) 6 19 $ 3 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 pup per.year from a supplier at a cost of $22 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 (0) and (2) below, assume the Pulp Division can sell all of its pulp to outside customers for $22 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 (f 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 Puip Division meets the price that the Carton Division is currenty paying to its supplier and sells 31,000 tons of puip to the Carton Division each year, what will be the effect on the profits of the Pulp Division, the Carton Dvision, and the company as a whole? For (3-(6 below. assume that the Pulp Division is currenty seling only 59,000 tons of ouip each year to outside customens at tne stated $22 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 trensfer prices (if ony) between the two divisions Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 31000 tons of puip next year? 4-a. Suppose the Carton Division's outside supplier drops its price (net of the purchase discound to only $18 per ton Should the Pup Division meet this price? 4-b, If the Puip Oivision 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 inflexibl le management policies, the Carton Division is required to purchase 31.000 tons of pany as a wholea pup each year from the Puip Division at $22 per ton What will be the effect on the profits of the cor
