q-1 Problem 11-20 (Algo) Transfer Price with an Outside Market [LO11-3]

Hrubec Products, Inc., 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			$	25
Expenses:
Variable	$	16
Fixed (based on a capacity of 103,000 tons per year)		6		22
Net operating income			$	3

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 31,000 tons of pulp per year from a supplier at a cost of $22.50 per ton. Hrubecs 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 $25 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 31,000 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 31,000 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?

For (3)(6) below, assume that the Pulp Division is currently selling only 62,000 tons of pulp each year to outside customers at the stated $25 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 voluntarily agree to a transfer price for 31,000 tons of pulp next year?

4-a. Suppose the Carton Divisions outside supplier drops its price to only $21 per ton. Should the Pulp Division meet this price? Yes or No

4-b. If the Pulp Division does not meet the $21 price, what will be the effect on the profits of the company as a whole?

5. Refer to (4) above. If the Pulp Division refuses to meet the $21 price, should the Carton Division be required to purchase from the Pulp Division at a higher price for the good of the company as a whole? Yes or No

6. Refer to (4) above. Assume that due to inflexible management policies, the Carton Division is required to purchase 31,000 tons of pulp each year from the Pulp Division at $25 per ton. What will be the effect on the profits of the company as a whole?

Req 1 Reg 2 Req3 Req 4A Reg 4B Reg 5 Reg 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 voluntarily agree to a transfer price for 31,000 tons of pulp next year? (Round "Maximum transfer price" answer to 1 decimal place.) Show less Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below: 2 Transfer price Are the managers likely to voluntarily agree to a transfer price for 31,000 tons of pulp next year? OYes ONO Reg 1 Reg 2 Req3 Reg 4A Req 4B Reg 5 Reg 6 If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 31,000 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? (Do not round intermediate calculations.) a. Profits of the Pulp Division will b. Profits of the Carton Division will c. Profits of the company as a whole will by by by 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 31,000 tons of pulp next year? (Round your answers to nearest whole dollar amount.) Show less Identify the lowest and highest acceptable transfer prices: Lowest acceptable transfer price Highest acceptable transfer price Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below: s Transfer price