Sustainable Industries manufactures cardboard containers (boxes) made from recycled paper products. The company operates two divisions, paper recycling and box manufacturing, as decentralized entities. The recycling division is free to sell recycled paper to outside buyers, and the box manufacturing division is free to purchase recycled paper from other sources. Currently, however, the recycling division sells all of its output to the manufacturing division, and the manufacturing division does not purchase materials from outside suppliers. The recycled paper is transferred from the recycling division to the manufacturing division at 110% of full cost. The recycling division purchases recyclable paper products for $ 0.075 per pound. The recycling division uses 100 pounds of recyclable paper products to produce one roll of recycled paper. The division’s other variable costs equal $ 6.35 per roll, and fixed costs at a monthly production level of 10,000 rolls are $ 2.15 per roll. During the most recent month, 10,000 rolls of recycled paper were transferred between the two divisions. The recycling division’s capacity is 15,000 rolls. With the increase in demand for sustainably made products, the manufacturing division expects to use 12,000 rolls of paper next month. Ecofree Corporation has offered to sell 2,000 rolls of recycled paper next month to the manufacturing division for $ 17.00 per roll.

Required
1. 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 Ecofree Corporation?
2. Is the purchase in the best interest of Sustainable Industries? Show your calculations. What is the cause of this goal incongruence?
3. The manufacturing division manager suggests that $ 17.00 is now the market price for recycled paper rolls and that this should be the new transfer price. Sustainable’s corporate management tends to agree. The paper recycling manager is suspicious. Ecofree’s prices have always been much higher than $ 17.00 per roll. Why the sudden price cut? After further investigation by the recycling division manager, it is revealed that the $ 17.00 per roll price was a one-time-only offer made to the manufacturing division due to excess inventory at Ecofree. Future orders would be priced at $ 18.50 per roll. Comment on the validity of the $ 17.00 per roll market price and the ethics of the manufacturing manager. Would changing the transfer price to $ 17.00 matter to Sustainable Industries?