For (3)-(6) below, assume that the Pulp Division is currently selling only 62,00
ID: 2724760 • Letter: F
Question
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 $20 price.
How much potential profit will the Pulp Division lose if the $15 price is not met?
Profit of the company will decrease by _________
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 $20 price.
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: $20 Selling price Expenses: Variable $10 Fixed (based on a capacity of 101,000 tons per year) 6 16 Net operating income $4 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 29,000 tons of pulp per year from a supplier at a cost of $20 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. Required For (1) and (2) below, assume that the Pulp Division can sell all of its pulp to outside customers for $20 per ton. 1-a. What is the minimum Transfer Price at which Pulp is willing to sell within the firm? Variable cost per unit Total contribution margin on lost sales$ No. of units transferred Transfer price2 2 4Explanation / Answer
1a Variable Cost per unit $10 Total Contribution Margin on Lost Sales (1) $10 # units Transferred 29000 Transfer Price $20 Note 1 Currently Pulp Divison is selling all it units at $20, with no spare capacity. The variable cost associated with it is $10 Contribution on Lost Sales = $20 - $10 = $10 2 Profit of the Pulp Divison will decrease by $2 * 29000 $58,000 Profit of the Cartoon Divison will remain unchanged $0 Profit of the company as a whole will decrease $2 * 29000 $58,000 This is because Pulp divison will supply at a price of $18, which is lower than its selling price of $20 and hence incur loss of $2 per unit 3 Profit of the Pulp Divison will increase by $10 * 29000 $290,000 Profit of the Cartoon Divison will decrease by $2 * 29000 $58,000 Profit of the company as a whole will increase $8 * 29000 $232,000 The fixed costs are already incurred and they are just recovered. Since, there is spare capacity, the company ideally can transfer at $10 Since transfer takes at $20 per unit, Profit per unit = $10 Cartoon Divison earlier purchase price = $18 Cartoon Divison current purchase price = $20 Per Ton Loss = $2