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 sell all tons of its production to outside customer at the regular price of $70 per ton. However, if Philco can sells to Bobco Box Company can save $17 per ton on shipping and sales commissions, In this case, can a negotiated transfer price be reached? If so, what would the negotiated price range?.

2. Assume Philco is currently producing 47,00 tons of pulp. What is the minimum price (both per unit and in total) that Philco should be willing to sell its pulp Bobco?

3.What would be the best strategic decision to Philco as a whole regarding selling pulp to Bobco. Be sure to state the effect on operating income compared to the current situation (Bobco is currently buying 5,000 tons from an outside supplier at $70 per ton).