BIRCH PAPER COMPANYBIRCH PAPER COMPANY

BACKGROUNDBACKGROUND Medium sized, partly integrated companyMedium sized, partly integrated company 3 products-white and Kraft papers and paperboard3 products-white and Kraft papers and paperboard

Working & AssessmentWorking & Assessment● Judgment based on profit and return on Judgment based on profit and return on

investment(ROI)investment(ROI)● Concept of decentralization-both authority and Concept of decentralization-both authority and

responsibilityresponsibility● Improvement attributed to above factorImprovement attributed to above factor

SITUATIONSITUATION● Northern and Thompson divisions together Northern and Thompson divisions together

designed box for Northern divisiondesigned box for Northern division● Thompson division was reimbursed by northern Thompson division was reimbursed by northern

division for it’s designing and development.division for it’s designing and development.● After finalization, apart from Thompson's bid it also After finalization, apart from Thompson's bid it also

get offers from two outside companies.get offers from two outside companies.● Company policy where each division manager had Company policy where each division manager had

full freedom and discretion to buy from anywhere . full freedom and discretion to buy from anywhere .

SITUATIONSITUATION

● Thompson’s most materials from within company, Thompson’s most materials from within company, but sales mostly to outsiders.but sales mostly to outsiders.

● If Thompson gets bid Materials to be procured If Thompson gets bid Materials to be procured from southern division.from southern division.

● 70% of out of pocket costs of $400 were of above 70% of out of pocket costs of $400 were of above materialsmaterials

● This constituted 60% of selling priceThis constituted 60% of selling price

BIDS(per 1000)BIDS(per 1000)

*Eire paper company and dilemma*Eire paper company and dilemma● It would buy outside linear board from birch with It would buy outside linear board from birch with

special printing(to be done by Thompson) @ a special printing(to be done by Thompson) @ a cost of $90(per thousand) and $30 for printing.cost of $90(per thousand) and $30 for printing.

● ““Competitive market where higher costs cannot be Competitive market where higher costs cannot be passed on, how can we buy our own supplies @ passed on, how can we buy our own supplies @ 10% higher than market rate.”10% higher than market rate.”

-William Kenton-William Kenton

(Manager, Northern division)(Manager, Northern division)

Other factorsOther factors

● Thompson division felt not received profit for Thompson division felt not received profit for their development work, hence entitled to mark their development work, hence entitled to mark up on production of box.up on production of box.

● ““Costs variable for one division could be largely Costs variable for one division could be largely fixed for company as a whole” fixed for company as a whole”

● Without orders from top management Kenton Without orders from top management Kenton would accept the lowest bid.would accept the lowest bid.

● Transactions involved only 5% of volume of Transactions involved only 5% of volume of divisions involved.divisions involved.

Which bid should northern division Which bid should northern division accept that is in best interest of the accept that is in best interest of the

company?company?● Thompson divisionThompson division; even though the bid from West Paper seems at ; even though the bid from West Paper seems at

first to be the best choice. first to be the best choice. ● In you calculate out the cost you find that Thompson actually has the In you calculate out the cost you find that Thompson actually has the

lowest costs associated with them.lowest costs associated with them.

(intricacies involved)(intricacies involved)

Costs involvedCosts involved

Costs for Thompson are a: Linearboard and Costs for Thompson are a: Linearboard and corrugating medium: Cost $400x70%*60%= corrugating medium: Cost $400x70%*60%= $168 plus Out of Pocket: $400x30%=120, for a $168 plus Out of Pocket: $400x30%=120, for a total cost of $288.total cost of $288.

Costs for West Papers would be a total of $430Costs for West Papers would be a total of $430 costs for Eire Papers would be $90x60%= $54 costs for Eire Papers would be $90x60%= $54

(Southern) plus $25 (Thompson), and their (Southern) plus $25 (Thompson), and their supplies of $432-5-36= $312 for a total of $391.supplies of $432-5-36= $312 for a total of $391.

Should Mr.kenton accept this bid?Should Mr.kenton accept this bid?

● Mr. Kenton should not accept the bid from West Mr. Kenton should not accept the bid from West because it isn’t in the best interest of the because it isn’t in the best interest of the company, but at the same time with the transfer company, but at the same time with the transfer policy that exists,policy that exists, it is really up to him what is it is really up to him what is in the best interests of his division. in the best interests of his division. I believe he I believe he should accept the bid from Thompson because should accept the bid from Thompson because not only will it result in the lowest cost, but also it not only will it result in the lowest cost, but also it will encourage buying from within the company.will encourage buying from within the company.

Vice president any action?Vice president any action?

● Yes. As if no orders come from top management Yes. As if no orders come from top management Kenton would accept the lowest bidKenton would accept the lowest bid

● The vice president of Birch should take action in The vice president of Birch should take action in order to remedy the overall problems associated order to remedy the overall problems associated with this transfer pricing policy. with this transfer pricing policy.

Is transfer pricing system Is transfer pricing system dysfunctional?dysfunctional?

● To an extent - yes. To an extent - yes. ● The transfer price system is dysfunctional The transfer price system is dysfunctional

because it focuses too much on individual sectors because it focuses too much on individual sectors making profit and return on investment.making profit and return on investment.

● Some alternative should be present which strikes Some alternative should be present which strikes a balance between both.a balance between both.

THANK YOUTHANK YOU