(Transfer Pricing)

Corrugated Box, Inc. has two divisions; recycled paper and box manufacturing, both divisions work as decentralized independent organizations. Even though both divisions are free to determine their suppliers and markets, in recent months the paper division has been selling all of its output to the manufacturing division, and the manufacturing division has not purchase materials from outside suppliers.

The recycled paper is transferred from the paper division to the box manufacturing division at 110% of full cost. The paper division purchases the recyclable material for $0.09 per pound. The paper division uses 100 pounds of recyclable paper products to produce one roll of recycled paper. The divisions other variable costs equal $7.35 per roll, and fixed costs at a monthly production level of 10,000 rolls are $4.15 per roll. During the most recent month, 10,000 rolls of recycled paper were transferred between the two divisions. The recycling divisions capacity is 15,000 rolls.

With the increase in demand for sustainably made products, the box manufacturing division expects to use 12,000 rolls of paper next month. The International Paper Corporation has offered to sell 2,000 rolls of recycled paper next month to the manufacturing division for $19.00 per roll.

Required:

Compute the transfer price per roll of recycled paper. If each division is considered a profit center, would the manufacturing manager choose to purchase 2,000 rolls next month from The International Paper Corporation?

Is the purchase in the best interest of Corrugated Box, Inc. ? Show your calculations and explain your reasoning.

The box manufacturing division claims that$19.00 is now the market price for recycled paper rolls and it should be the new transfer price. What will be the consequences if this claim is accepted. Assuming that you work for the central management, what would be your response.