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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