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

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

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.

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