Birch paper company
Download as PPTX, PDF
24 likes50,196 views
The document discusses a dilemma faced by the Northern division of Birch Paper Company in choosing between bids for manufacturing 1000 boxes. The Northern division received bids from the Thompson division ($480), West Paper Company ($430), and Eire Paper Company ($432). While the Thompson bid is highest, choosing it would support buying internally. The vice president should provide guidance as the current transfer pricing system prioritizes divisional profits over company interests, making it dysfunctional.
Birch paper company
- 1. Birch Paper Company Almalia Hardy (10312039) Lariza Selvi Meilisa Nur Sahar Nur Mazkiyani
- 2. Background Medium sized, partly integrated company Three product; white and Kraft papers and paperboard Birch Northern Southern Thompson Division 4 Division 4
- 3. Working and Assessment Judgment based on the basis of its profit and return on investment (ROI) Concept of decentralization-both authority and responsibility Improvement attributed to above factor
- 4. Situation Northern and Thompson division together designed box for Northern division Thompson division was reimbursed by Northern division for its designing and development After finalization, apart from Thompsons bid it also get offers from two outside companies Company policy where each division manager had full freedom and discretion to buy from anywhere
- 5. Cont. Thompsons most materials from within company but sales mostly outsiders If Thompson gets bid materials to be procured from Southern division 70% of out of pocket costs of $400 were above materials This constituted 60% of selling price
- 6. The Northern division received bids on 1000 boxes From Thompson division - $480 From West Paper Company - $430 From Eire Paper Company - $432
- 7. Eire paper Company and dilemma It would buy outside linear board from Birch with special printing (to be done by Thompson) $90 (a thousand boxes) and $30 for printing. Competitive market where higher costs cannot be passed on, how can we buy own supplies @10% higher than market rate.
- 8. Other Factors Thompson division felt not received profit for their development work, hence entitled to mark up on production of box Cost variable for one division could be largely fixed for company as a whole Without orders from top management Kenton would accept the lowest bid Transaction involved only 5% of volume of divisions involved
- 9. Which bid should Northern division accept that is in best interest of the company? Thompson division In the calculation out the cost that Thompson actually has the lowest costs associated with them
- 10. Cost involved Costs for Thompson are; Linear board and corrugating medium: Cost $400x70%x60%=$168 plus out of pocket: $400x30%=$120, for a total cost $288 Cost for West Paper would be a total $430 Cost for Eire Papers would be $90x60%=$54 (Southern) plus $25 (Thompson), and their supplies of $432-5-36=$391, total cost $470
- 11. Should Mr. Kenton accept this bid? Mr. Kenton should not accept the bid from West Paper because it is not 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 interest of his division. Mr. Kenton should accept the bid from Thompson because not only will result in the lowest cost but also it will encourage buying from within the company
- 12. Vice president action Yes the vice president should take any action. As if no orders come from top management Kenton would accept the lowest bid The vice president of the Birch should take action in order to remedy the overall problems associated with this transfer pricing policy
- 13. Is transfer pricing system dysfunctional? 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