Problem 11-20 (Algo) Transfer Price with an Outside Market [LO11-3] 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 $ 84 Expenses: Variable $ 56 Fixed (based on a capacity of 50,000 tons per year) 18 Net operating income 74 $ 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 5,700 tons of pulp per year from a supplier at a cost of $77 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 $84 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 5,700 tons of pulp next year? 2. If the Pulp Division meets the price the Carton Division is currently paying to its supplier and sells 5,700 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 $84 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 5,700 tons of pulp next year? 4-a. Suppose the Carton Division's outside supplier drops its price to only $73 per ton. Should the Pulp Division meet this price? 4-b. If the Pulp Division does not meet the $73 price, what will be the effect on the company's profits? 5. Refer to requirement 4. If the Pulp Division refuses to meet the $73 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 5,700 tons of pulp each year from the Pulp Division at $84 per ton. What will be the effect on the company's profits? Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 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 5,700 tons of pulp next year? Range of acceptable transfer prices $ 74 Transfer price $ 56 Are the managers likely to voluntarily agree to a transfer price for 5,700 tons of pulp next year? Yes < Required 1 Required 2 > Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 If the Pulp Division meets the price the Carton Division is currently paying to its supplier and sells 5,700 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? Note: Do not round intermediate calculations. a. Profits of the Pulp Division will decrease by $ 7 b. Profits of the Carton Division will c. Profits of the company as a whole will remain unchanged decrease by $ by < Required 1 Required 3 > Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 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 5,700 tons of pulp next year? Note: Round your answers to nearest whole dollar amount. Identify the lowest and highest acceptable transfer prices: Lowest acceptable transfer price Highest acceptable transfer price Range of acceptable transfer prices Are the managers likely to voluntarily agree to a transfer price for 5,700 tons of pulp next year? < Required 2 Required 4A > $ 56 $ 77 $56 s Transfer price $77 Yes Show less Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 Suppose the Carton Division's outside supplier drops its price to only $73 per ton. Should the Pulp Division meet this price? Should the Pulp Division meet this price? < Required 3 Required 4B > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 If the Pulp Division does not meet the $73 price, what will be the effect on the company's profits? Profit of the company will decrease by $ 73 < Required 4A Required 5 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 Refer to requirement 4. If the Pulp Division refuses to meet the $73 price, should the Carton Division be required to purchase from the Pulp Division at a higher price for the good of the company? Should the Carton Division be required to purchase from the Pulp Division < Required 4B Yes Required 6 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4A Required 4B Required 5 Required 6 Refer to requirement 4. Assume due to inflexible management policies, the Carton Division is required to purchase 5,700 tons of pulp each year from the Pulp Division at $84 per ton. What will be the effect on the company's profits? The company as a whole will have a(n) increase in profit by $ 84 < Required 5 Required 6