Group Case Analysis

Birch Papers Company

Ideo Edvanditya Agritama / 141520911

Rahma Shella Resya / 141521553
Natya Nindyagitaya / 141521573
Winkly Hoetanto / 141521736

Universitas Atma Jaya Yogyakarta

2016

Case Summary
Birch Paper Company has some divisions which are Southern Division,
Thompson Division and Northern Division. Every division has score
independently base on profit and return on investment. This company was
implement decentralization system and the profit is increased by
competitive market.
Northern Division has planned a box with special appearance for paper
who produced with Thompson Division. Thompson Division is pay by
Northern Division in designing and its development. Northern Division
asked a bid for that box from Thompson Division and external company.
So, they have three options:

Thompson Division offered $ 480

West Paper Division offered $ 430

Eire Papers offered $ 432

There will be many considerations in choosing the company, because

each has their own positive and negative impact. Mr. Kenton should
choose which one is better and should chose by company.

Which bid should Northern Division accept that is in

best interests of Birch Paper Company?
We think, Northern Division should accept Thompson Division for the best
interest of Birch Paper Company, because Northern Division in this case
can implement the management control over its company by ensuring the
resources are fully obtained and used effectively and efficiently in the
accomplishment of the company's objectives. In this case Thomson
Division is not charging more because of inefficiencies but is charging
more because it is allocating its overhead to the cost of production. That
overhead that it has actually incurred in the development and designing

of the new box. It is as if the development cost of the product is being

charged to the cost of the product.

The calculation based on costs:

Thompson Division Costs Linear board and corrugating medium
(70% x 400) x 60% = 168
Out of pocket costs 30% x 400 = 120
Total 288
West Papers Costs
Total = 430
Eire Papers Costs Outside linear
Southern division = 60% x 90 = 54
Thompson division (Printing) = 25
Own Supplies = 432-5-36 = 312
Total 391
As shown in the calculations above, Northern should accept the bid from
Thompson division as it has the lowest cost if all transfer prices within the
company were calculated at costs. Incurring the lowest costs would also
enable Birch Paper Company to earn the highest profits possible.

Should Mr. Kenton accept this bid? Why or why not?

Thompson Division

: $ 480

West Paper Company

: $ 430

Eire Papers

: $ 432

Facts:

$ 480 because Thompson got price from Southern Division as $ 400.

Bruner cannot operate Thompson Division well.

Kenton decide to choose West Paper Companys bid.

Advices:

Northern Division should receive Division Thompson because based

on calculation in the end Thompson Division give the lowest price.

Receiving Thompson Division will give support to decentralization by

company.

The cycle of this company is Southern Division Thompson Division

Northern Division.

Conclusions:
Mr. Kenton should accept Thompson Divisions bid because it creates a
balance within Birch Paper Company. Even it sounds expensive to buy, but
it will give profit for Thompson Division & Southern Division. Then the
profit will come back to the company. It also helps Thompson Division to
operate well thru gaining profit. It also supports in campaign of
decentralization among division in this company. In other words, it will
encourage buying from within company.

Should the vice president of Birch Paper Company take

any action?
Yes, he should. The Vice President should take some action. If the Vice
President does not intervene, Northern Division will surely buy from Erie
Papers. Here, only Northern Division will save $ 50 ($480 $430).
However, if the Vice President forces Thompson Division and Southern
Division to transfer the products, the company will save $ 142 ($430
$288). We can see that the saving is larger if the Northern Division
chooses to accept the transfer of products from Thompson and Southern
Division compare to buying from Erie Papers. This amount can be then
divided amongst the three division based on their overhead costs and
sustainable profitability.

In the controversy described, how if at all, is the

transfer price system dysfunctional? Does this problem
call for some change, or changes, in th e transfer pricing
policy of the overall firm? if so, what specific changes do
you suggest?
Transfer pricing system in Birch Paper Co. can not walk properly because
the company is too focused on ROI and profits of each division. This
causes each division to focus more on his own division profit without
considering the company's overall profit.
These problems lead to the need for change in the pricing policy of the
company's overall transfer. Changes in transfer pricing that is needed is
the transfer price between divisions in the company should refer to the
market price. The market price is the price of the product occurring in the
external market as the end result of a bargaining process all market
players (producers and consumers). By using the market price as the price
of the transfer, both the sellers and buyers division no one getting lose.
However, the method of the transfer price of the market price can only be
done when the conditions of market competition is in the perfect
competition (ideal conditions).
In addition, there must be an external market for the products sold, and
both divisions buyer or seller should be free to buy or sell products. In
addition, negotiations shall be undertaken to determine the transfer price.
Negotiations itself an agreement on the purchase price and the selling
price between the buyer and the seller. Another way of transfer pricing is
based on cost or cost-based transfer pricing. The company set the price of

the transfer on fees based on a variable and / or fixed costs in the form of:
full cost,the full cost plus a mark-up and a combination of variable cost
plus fixed fee. If there is a transfer pricing conflict in which business units
do not agree to the prices of certain then to do arbitrage.