BIRCH PAPER COMPANY

BACKGROUND
 

Medium sized, partly integrated company 3 products-white and Kraft papers and
paperboard

BIRCH

Northern

Southern

Thompson

Division 4

Timberland
Working & Assessment
●

Judgment based on profit and return on investment(ROI)

Concept of decentralization-both authority and responsibility Improvement
attributed to above factor

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SITUATION
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Northern and Thompson divisions 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 .
SITUATION
●

Thompson’s 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

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BIDS(per 1000)
Thompson - $480

West Paper Company - $432

Eire Paper Company - $430*

*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.

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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 isn’t 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.

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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.

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THANK YOU