Case Title: Del Norte Paper Company (A)

Group No.: 8 PGP-20 (2016-18)

1. How correct is Duffy when he says to John but I just cannot compete if I have to pay $360
per ton...I will have to price corrugated boxes below cost in order to win any contracts.
Justify using pricing calculations given in the case.

Particulars / Items Calculations

European Subsidiary $ 400
Sales Revenue $ 325
Cost of linerboard per ton for making box $ 235
Conversion cost $ 90 ($ 325 - $ 235)
Fixed cost per ton for raw material $ 220
Conversion ratio (For US Mill) 1.07 ($ 235/$ 220)
If Linerboard were purchased from American mill, the cost of linerboard $ 360
Cost of linerboard per ton of corrugated boxes $ 385 ($ 360 1.07)
Conversion cost $ 90
Total direct cost per ton $ 475 ($ 385 + $ 90)

Net Profit = ($ 75). Under transfer pricing this will not come in the profit and loss statement of DNP
Italia. Therefore, DNP Italia will not be able to compete if it purchases from American mill as then it
would incur loss as shown in calculation.

2. Why did DNP-Italia win the African order while DNP-Deutschland lost it? What does it tell
about indirect costs and profits in the order?

DNP-Italia won the African order because DNP Italias bid $400 per ton which was lower than
DNP-Deutschlands bid of $550 per ton. DNP Italia used European Spot market cost per ton of
Linerboard which was $220 whereas DNP Deutschland used American mill cost of per ton of
linerboard which was $360.

The profit/ton before deducting the indirect cost for each unit is more for DNP-Deutschland.
While assuming that similar indirect cost on orders as they all are from the subsidiaries of the
same parent company, the profit collected in the order from Deutschland would be higher than
the profit from DNP Italia.

3. To Duffy's statement in Question 1 above Powell replied, ' But you would get credited with
the mill profit in the transaction- you wouldn't have to report a loss'. What is your opinion
of the international transfer pricing being followed by DNP?

Particulars / Items Calculations

Bid Amount per Ton $ 400
Direct Cost per ton if purchased from American mill $ 475
Conversion ratio ( Previous calculation) 1.07
Considering the same freight and carrier cost as of Germany $ 48 ($ 45 1.07)
in Italy
Cost for American Mill $ 203 ($ 190 1.07)
Transfer of credit to American mill in the form of Profit ( $ 134 ($ 385 - $ 203 - $ 48)
Loss)

Therefore, profit / loss without accounting the indirect cost is $ 59 ( $400+$134 - $475 ).
4. What do you make of HQ-subsidiary relationship when Powell says ' by not purchasing
DNP linerboard when times are bad, you run the risk of ...when there is a shortage like
there was two years ago. As you know......through the KEA'.

The subsidiary business of DNP is a safekeeping distance where each subsidiary has its own
profit loss statement. They are competing each other for a common customer base. HQ
wants the role of its European subsidiaries as that of Implementer. HQ wants its strategies
to be followed by all its subsidiary so that it will bring efficiency to them.