Knox Chemical Corporation is one of the largest producers of isopropyl

alcohol, or isopropanol, as it frequently is called. Isopropanol is used to produce

acetone, an important industrial chemical; it is also used to make various

chemical intermediate products. Because Knox Chemical produces both

acetone and these chemical intermediates, it uses much of the isopropanol it

makes. One of the many tasks of Knox’s product manager for isopropanol is

to set transfer prices for isopropanol within the company.

a. Knox’s product manager for isopropanol generally sets the transfer price

equal to the prevailing market price. Is this a sensible procedure?

b. When the production of phenol expands rapidly, a great deal of acetone

is produced because it is a by-product of the process leading to phenol.

What effect do you think this has on the market price of isopropanol?

c. In producing a pound of phenol, 0.6 pound of acetone is produced. Are

phenol and acetone joint products?

d. Are they produced in fixed proportions?


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