Birch Paper

Company
Almalia Hardy (10312039)
Lariza Selvi
Meilisa Nur Sahar
Nur Mazkiyani
 Background
Medium sized, partly integrated
company

Three product; white and Kraft papers

and paperboard Birch

Souther Thomps Division Division

Northern
n on 4 4
 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
 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
 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

 The Northern division
received bids on 1000 boxes
From Thompson division - $480

From West Paper Company - $430

From Eire Paper Company - $432

 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.
 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
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
 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
 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
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
 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