Question 4: Transfer Pricing [12 Marks] Loki Lumber Company manufactures wood pulp for the production of several paper products. At the beginning of the year, sales were expected to be 50,000 tons (their maximum capacity), and the following figures were estimated for budgeting purposes ales (50 Variable Costs tons 100,000 ontribution Margin 1,400,000 ixed Costs perating Income 500,000 Loki has just purchased Bobco Box Company, a smaller company that makes cardboard boxes. This new company will be treated as a division of Loki 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 Loki wants the new company to begin purchasing pulp from his factory and has asked the managers of both companies to arrange a transfer price Required Scenario 1: The Loki factory is not producing as much pulp as expected due to slower than expected sales, and expects to produce only 42,000 tons of pulp this year 1) The opportunity cost (per ton) in this case would be? (1 mark) 2) Is a negotiated transfer price possible between Loki Lumber and Bobco Box? If so, what is the range of this price? (2 marks) 3) If a negotiated price of $60 per ton is agreed to, how would the net incomes of both companies be affected? (2 marks) Scenario #2: Assume Loki is currently producing 47,000 tons of pulp 1) The opportunity cost (per ton) in this case would be? (2 marks) 2) What is the minimum price (per ton) that Loki should be willing to sell its pulp to Bobco? (2 marks) 3) What would be the best strategic decision for Loki as a whole regarding selling pulp to Bobco? Be sure to state the effect on operating income compared to the current situation)