Question
Hrubec Products, Incorporated, operates a Pulp Division that manufactures wood pulp for use in the production of various paper goods. Revenue and costs associated
Hrubec Products, Incorporated, 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 $110 Expenses Variable $82 Fixed (based on a capacity of 50,000 tons per year) 18 100 $ 10 Net operating income Hrubec Products has just acquired a small company that manufactures paper cartons. Hrubec plans to treat its newly acquired Carton Division as a profit center. The manager of the Carton Division is currently purchasing 7.000 tons of pulp per year from a supplier at a cost of $103 per ton. Hrubec's president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if the managers of the two divisions can negotiate an acceptable transfer price. Required: For (1) and (2) below, assume the Pulp Division can sell all of its pulp to outside customers for $110 per ton. 1. What is the Pulp Division's lowest acceptable transfer price? What is the Carton Division's highest acceptable transfer price? 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 7,000 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 7,000 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?
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