Problem $11-20($Algo$)$ Transfer Price with an Outside Market $[$LO$11-3]$

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 $ $100$

Expenses:

Variable $ $72$

Fixed $($based on a capacity of $50,000$ tons per year$)1890$

Net operating income $ $10$

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 $6,500$ tons of pulp per year from a supplier at a cost of $$93$ per ton. Hrubec$$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 $$100$ 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 agree to a transfer price for $6,500$ tons of pulp next year?

$2.$ If the Pulp Division meets the price the Carton Division is currently paying to its supplier and sells $6,500$ 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?

For $(3)(6)$ below, assume the Pulp Division is currently selling only $30,000$ tons of pulp each year to outside customers at the stated $$100$ price.

$3.$ 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 agree to a transfer price for $6,500$ tons of pulp next year?

$4-$a$.$ Suppose the Carton Division$$s outside supplier drops its price to only $$89$ per ton. Should the Pulp Division meet this price?

$4-$b$.$ If the Pulp Division does not meet the $$89$ price, what will be the effect on the company$$s profits?

$5.$ Refer to requirement $4.$ If the Pulp Division refuses to meet the $$89$ price, should the Carton Division be required to purchase from the Pulp Division at a higher price for the good of the company?

$6.$ Refer to requirement $4.$ Assume due to inflexible management policies, the Carton Division is required to purchase $6,500$ tons of pulp each year from the Pulp Division at $$100$ per ton. What will be the effect on the company$$s profits?