ACCT 801

Birch Paper Company

Mengchun Wu
1.
Southern Division Thompson Division
Price $280 $480
Internal Transfer $280
Variable Cost $188 $120
Total Cost $188 $400
Contribution $92 $80

Analyzing the Southern Division cost, the out-of-pocket cost is $168, but the selling

price either internal to the Thompson Division or external is $280. However, it had been

running below capacity and had excess inventory which means that market rate was not

at the optimal price to charge for internal division. The Southern Division could set the

transfer price to be the variable cost in order to make sure that its bottom line which is

selling the excess inventory.

Analyzing the Thompson Division, the out-of-pocket cost is $120 and the

transferring cost is $280 from the Southern Division. The Division sells its product

by $480 to the Northern Division or outside. However, the Thompson Division

could not operate at capacity during the past few months. Therefore, the selling

price internally or externally is higher than market price. The Thompson Division

could establish its transfer price at marginal cost to fulfill the order.
2. If calculating by marginal costs, the Thompson Division will have competitive

advantage $288. The out-of-pocket cost from the Thompson Division is $120 and

from the Southern Division is $168. As a result, the Northern Division would

choose the Thompson Division. The Birch Paper Company can not only minimize

the cost, but also can maximize revenue and profit.

3. Evaluating the Northern Division bid options: it can receive $480 from the

Thompson Division, $430 from West Paper Company and $432 from Eire

Papers, Ltd; but Eire Papers purchases from outside liners which are the

Southern Division and the Thompson Division. Therefore, net out-of-pocket to

Birch is $391. Based on the market rate transfer price, the Northern Division

would choose the bid from Eire Papers Ltd. $391. Using market based

transferring price, it allows the Birch Paper Company determine the true market
value and also allow each division observe its performance and reduce

misallocation resources.