Birch Paper Company

Almalia Hardy (10312039)Lariza Selvi

Meilisa Nur SaharNur Mazkiyani

Background

• Medium sized, partly integrated company

• Three product; white and Kraft papers and paperboard Birch

Southern

Thompson

Division 4Northern Division

4

Working and Assessment

• Judgment based on the basis of its profit and return on investment (ROI)

• Concept of decentralization-both authority and responsibility

• Improvement attributed to above factor

Situation

• Northern and Thompson division together designed box for Northern division

• Thompson division was reimbursed by Northern division for it’s designing and development

• After finalization, apart from Thompson’s bid it also get offers from two outside companies

• Company policy where each division manager had full freedom and discretion to buy from anywhere

Cont.

• Thompson’s most materials from within company but sales mostly outsiders

• If Thompson gets bid materials to be procured from Southern division

• 70% of out of pocket costs of $400 were above materials

• This constituted 60% of selling price

The Northern division received bids on 1000 boxes

• From Thompson division - $480

• From West Paper Company - $430

• From Eire Paper Company - $432

Eire paper Company and dilemma

• It would buy outside linear board from Birch with special printing (to be done by Thompson) $90 (a thousand boxes) and $30 for printing.

• “Competitive market where higher costs cannot be passed on, how can we buy own supplies @10% higher than market rate.

Other Factors

• Thompson division felt not received profit for their development work, hence entitled to mark up on production of box

• “Cost variable for one division could be largely fixed for company as a whole”

• Without orders from top management Kenton would accept the lowest bid

• Transaction involved only 5% of volume of divisions involved

Which bid should Northern division

accept that is in best interest of the

company?• Thompson division

• In the calculation out the cost that Thompson actually has the lowest costs associated with them

Cost involved

• Costs for Thompson are; Linear board and corrugating medium: Cost $400x70%x60%=$168 plus out of pocket: $400x30%=$120, for a total cost $288

• Cost for West Paper would be a total $430

• Cost for Eire Papers would be $90x60%=$54 (Southern) plus $25 (Thompson), and their supplies of $432-5-36=$391, total cost $470

Should Mr. Kenton accept this bid?

• Mr. Kenton should not accept the bid from West Paper because it is not in the best interest of the company, but at the same time with the transfer policy that exists, it is really up to him what is in the best interest of his division. Mr. Kenton should accept the bid from Thompson because not only will result in the lowest cost but also it will encourage buying from within the company

Vice president action

• Yes the vice president should take any action. As if no orders come from top management Kenton would accept the lowest bid

• The vice president of the Birch should take action in order to remedy the overall problems associated with this transfer pricing policy

Is transfer pricing system dysfunctional?

• Yes

• The transfer price system is dysfunctional because it focuses too much on individual sectors making profit and return on investment

• Some alternative should be present which strikes a balance between both