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

$21

Expenses:

Variable

$12

Fixed (based on a capacity of 101,000 tons per year)

6

18

Net operating income

$3

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 28,000 tons of pulp per year from a supplier at a cost of $21 per ton, less a 10% purchase discount. Hrubecs 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 that the Pulp Division can sell all of its pulp to outside customers for $21 per ton.

1-a.	What is the minimum transfer price for Carton Division?

1b.

What is the maximum transfer price that Pulp Division is ready to pay? (Round your answer to 2 decimal places.)

Maximun transfer price:

1-c.

Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 28,000 tons of pulp next year?

	No
	Yes

2.	If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 28,000 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?

a. profits of the Pulp DIvision will _____________ by _____________

b. profits of the Carton Division will _____________ by _____________

c. Profits of the company as a whole will _____________ by _____________

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 $21 price.

3a.	What is the minimum transfer price for Pulp Division?

minimum trasnfer price:

3b.

What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.)

The lowest transfer price would be ____________ and the highest transfer price would be_________

3-c.

Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 28,000 tons of pulp next year?

	Yes
	No

4-a.

Suppose that the Carton Divisions outside supplier drops its price (net of the purchase discount) to only $17 per ton. Should the Pulp Division meet this price?

	Yes
	No

4-b.	How much potential profit will the Pulp Division lose if the $17 price is not met?

Profit of the company will___________by ________________

5.

Refer to (4) above. If the Pulp Division refuses to meet the $17 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?

	No
	Yes

6.

Refer to (4) above. Assume that due to inflexible management policies, the Carton Division is required to purchase 28,000 tons of pulp each year from the Pulp Division at $21 per ton. What will be the effect on the profits of the company as a whole? a. The pulp division will have a(n) ______________in profit by_______________ b. The carton division will have a(n) ____________in profit by________________ c. The company as a whole will have a(n) _____________in profit by_______________