PhilcoLumber Company manufacturing wood pulp for the production of several paper products . Sales are expected to be 50,000 tons this year, and the following figures were estimated for budgeting purposes:

Sales (50,000 tons) $3,500,000

Variable costs 2,100,000

Contribution Margin 1,400,000

Fixed Costs 900,000

Net Income $ 500,000

Philco company has just purchased Bobco Box Company, a smaller company that makes cardboard boxes. This new company will be treated as a division of Philco Lumber with full profit responsibilities.

Bobco is currently buying 5,000 tons of wood pulp from another supplier for $70 per ton. The CEO of Philco wants the new company to begin purchasing pulp from his factory, and has asked the managers both companies to arrange a transfer price.

Questions:

1. The Philco factory can sel all 50,000 tons of its production to outside customers at the regular price $70 per ton. Can a negotiated price be reached? If so, what would be the negotiated prince range?

2. If the new company is forced to purchase from the Philco factory, what will happen to the operating incomes of each company?