Birch paper Company

Summary about the case

Birch Paper Company was founded in 1941
Birch Paper Company is a medium sized, partly integrated paper company which contained four production divisions, including Thompson division, and a timberland division. Each division is encouraged to base its transfer price on the current market price and is judged independently on the basis of its profit and return on investments.

PROBLEM IDENTIFICATION
The problem facing this company is whether its decentralized divisions should buy from one another and help the company as a whole, or buy from an outside third party and possibly increase the profits of one division while neglecting the other divisions of the company. The Northern Division, while seeking a company to manufacture new boxes it needs, has obtained bids from three companies: the West Paper Company; the Thompson Division of Northern's parent company, Birch and the Eire Papers company.

Questions 1.Which bid should Northern Division accept that is in the best interests of Birch Paper Company? Northern Division should accept the bid of the 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.

Calculation
Buy from West Paper Company Variable cost to Northern Division of sourcing the boxes from West Paper $430

Buy from Thompson Division Thompson Divisions variable costs excluding transfer price

$120 $168

($400*30%) Southern Divisions variable costs

(Transfer price from Southern Division: $400*70% = $280; $280*60%) Total variable costs for the company

$288

Buy from Eire Papers, Ltd. Variable cost to Northern Division of sourcing the boxes from Eire $432 Papers Net of: Profit to Southern Division of providing materials to Eire ($36) Papers ($90*40%) Net of: Profit to Thompson Division of providing printing for Eire ($5) Papers ($30-$25) Net variable costs for the company $391

2.Should Mr.Kenton accept this bid? Why or why not?

In this case Mr. Kenton should accept the bid of the Thompson Division. There are several reasons for this. Kenton can establish management control. He should ensure that resources are obtained and used effectively and efficiently in the accomplishment of the company's objectives. Mr. Kenton should not accept the bid from west because it isnt in the best interest of the company, but at the same time transfer policy that exists, it really up to him, what is in the best interest of his division. I believe that he should accept the bid from Thomson because not only with it result in the lowest cost but also it will encourage buying from within the company.

3.Should the vice president of Birch Paper Company take any action?
The vice president of birch should take actions, but not against just this division. I think he needs to take action in order to remedy the overall problems associated with these transfer policy. If needed top management is able to order the acceptance of another bid.

4.In the controversy described, how if at all, is the transfer price system dysfunctional? Does this problem call for some change, or changes, in the transfer pricing policy of the overall firm? If so, what specific changes do you suggest?

 The transfer price system is dysfunctional because it focuses too much on individual sectors making profit and return on investment. It should focus on success and profit for the overall company not just individual profit. Each division might have short term profits. But in the long time it is going to work out. I think that the transfer pricing policy needs to be revised in order to work for the company as a whole. Changes I might suggest would be for the company to restructure and become more centralized with one over goal as well as an understanding of how each division work together