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268ebirch Paper Company

This document discusses a situation at Birch Paper Company involving bids from different divisions for a box design project. The Northern division received bids from Thompson (internal) and two external companies. Thompson's bid was highest at $288 per 1000, while an external bid from West Paper was $430 and from Eire Paper was $391. The Northern division manager felt obligated to accept the lowest bid but was concerned about buying internal supplies at a higher rate. The document examines the various costs involved and determines that Thompson's bid is actually lowest cost for the company. It recommends the vice president take action to remedy issues with the current transfer pricing system that does not consider overall company costs and profits.

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Sumit Singh Goraya
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95 views14 pages

268ebirch Paper Company

This document discusses a situation at Birch Paper Company involving bids from different divisions for a box design project. The Northern division received bids from Thompson (internal) and two external companies. Thompson's bid was highest at $288 per 1000, while an external bid from West Paper was $430 and from Eire Paper was $391. The Northern division manager felt obligated to accept the lowest bid but was concerned about buying internal supplies at a higher rate. The document examines the various costs involved and determines that Thompson's bid is actually lowest cost for the company. It recommends the vice president take action to remedy issues with the current transfer pricing system that does not consider overall company costs and profits.

Uploaded by

Sumit Singh Goraya
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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BIRCH PAPER COMPANY

BACKGROUND
 Medium sized, partly integrated company
 3 products-white and Kraft papers and paperboard
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 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
BIDS(per 1000)
*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 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.
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

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