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
97,000 tons per year) |
6 |
22 |
| Net operating income |
|
$3
|
|
|
Hrubec Products has just acquired a small company that manufactures paper cartons. This company will be treated as a division of Hrubec with full profit responsibility. The newly formed Carton Division is currently purchasing 30,000 tons of pulp per year from a supplier at a cost of $25 per ton, less a 10% purchase discount. Hrubec's president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if an acceptable transfer price can be worked out."
|
|
For Requirement 1 through 2 below, assume that the Pulp Division can sell all of its pulp to outside customers for $25 per ton.
|
| Requirement 1: |
| (a) |
What is the minimum transfer price for Pulp Division? (Omit the "$" sign in your response.)
|
| (b) |
What is the maximum transfer price that Carton Division is ready to pay? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
|
| (c) |
Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 30,000 tons of pulp next year?
|
| Requirement 2: |
|
If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 30,000 tons of pulp to the Carton Division each year, what will be the effect on the profits of the Pulp Division, the Carton Division, and the company as a whole? (Leave no cells blank - be certain to enter "0" wherever required. Inputs all amounts as positive values. Omit the "$" sign in your response.)
|
|
|
| a. |
Profits of the Pulp Division will (Click to select)decreaseremains unchangedincrease by $. |
| b. |
Profits of the Carton Division will (Click to select)increaseremains unchangeddecrease by $. |
| c. |
Profits of the company as a whole will (Click to select)decreaseincreaseremains unchanged by $. |
|
| For Requirement 3 through 6 below, assume that the Pulp Division is currently selling only 56,000 tons of pulp each year to outside customers at the stated $25 price. |
| Requirement 3: |
| (a) |
What is the minimum transfer price for Pulp Division? (Omit the "$" sign in your response.)
|
| (b) |
What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places. Omit the "$" sign in your response.)
|
| (c) |
Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 30,000 tons of pulp next year?
|
| Requirement 4: |
| (a) |
Suppose that the Carton Division's outside supplier drops its price (net of the purchase discount) to only $21 per ton. Should the Pulp Division meet this price?
|
| (b) |
How much potential profit will the Pulp Division lose if the $21 price is not met? (Inputs all amounts as positive values. Omit the "$" sign in your response.)
|
| Profit of the company will (Click to select)increasedecrease by $ |
| Requirement 5: |
|
Refer to Requirement 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?
|
| Requirement 6: |
|
Refer to Requirement 4 above. Assume that due to inflexible management policies, the Carton Division is required to purchase 30,000 tons of pulp each year from the Pulp Division at $25 per ton. What will be the effect on the profits of the company as a whole? (Inputs all amounts as positive values. Omit the "$" sign in your response.)
|
|
|
| a. |
The Pulp Division will have an (Click to select)decreaseincrease in profit by $. |
| b. |
The Carton Division will have a (Click to select)increasedecrease in profit by $. |
| c. |
The company as a whole will have an (Click to select)increasedecrease in profit by $. |