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BIRCH PAPER COMPANY

BACKGROUND

Medium sized, partly integrated company

3 products-white and Kraft papers and paperboard

BIRCH
Northern

Working & Assessment

Judgment based on profit and return on


investment(ROI)
Concept of decentralization-both authority and
responsibility
Improvement attributed to above factor

SITUATION

Northern and Thompson divisions together


designed box for Northern division
Thompson division was reimbursed by northern
division for its 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 .

SITUATION

Thompsons most materials from within company,


but sales mostly to outsiders.
If Thompson gets bid Materials to be procured
from southern division.
70% of out of pocket costs of $400 were of above
materials
This constituted 60% of selling price

BIDS(per 1000)
Thompson - $480

*Eire paper company and dilemma

It would buy outside linear board from birch with


special printing(to be done by Thompson) @ a
cost of $90(per thousand) and $30 for printing.
Competitive market where higher costs cannot be
passed on, how can we buy our own supplies @
10% higher than market rate.
-William Kenton
(Manager, Northern division)

Other factors

Thompson division felt not received profit for


their development work, hence entitled to mark
up on production of box.
Costs variable for one division could be largely
fixed for company as a whole
Without orders from top management Kenton
would accept the lowest bid.
Transactions involved only 5% of volume of
divisions involved.

Which bid should northern division


accept that is in best interest of the
company?

Thompson division; even though the bid from


West Paper seems at first to be the best choice.
In you calculate out the cost you find that
Thompson actually has the lowest costs
associated with them.
(intricacies involved)

Costs involved

Costs for Thompson are a: Linearboard and


corrugating medium: Cost $400x70%*60%=
$168 plus Out of Pocket: $400x30%=120, for a
total cost of $288.
Costs for West Papers would be a total of $430
costs for Eire Papers would be $90x60%= $54
(Southern) plus $25 (Thompson), and their
supplies of $432-5-36= $312 for a total of $391.

Should Mr.kenton accept this bid?

Mr. Kenton should not accept the bid from West


because it isnt 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 interests of his division. I believe he
should accept the bid from Thompson because
not only will it result in the lowest cost, but also
it will encourage buying from within the
company.

Vice president any action?

Yes. As if no orders come from top management


Kenton would accept the lowest bid
The vice president of Birch should take action in
order to remedy the overall problems associated
with this transfer pricing policy.

Is transfer pricing system


dysfunctional?

To an extent - 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.

THANK YOU