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Analyzing the Southern Division cost, the out-of-pocket cost is $168, but the selling
price either internal to the Thompson Division or external is $280. However, it had been
running below capacity and had excess inventory which means that market rate was not
at the optimal price to charge for internal division. The Southern Division could set the
transfer price to be the variable cost in order to make sure that its bottom line which is
Analyzing the Thompson Division, the out-of-pocket cost is $120 and the
transferring cost is $280 from the Southern Division. The Division sells its product
could not operate at capacity during the past few months. Therefore, the selling
price internally or externally is higher than market price. The Thompson Division
could establish its transfer price at marginal cost to fulfill the order.
2. If calculating by marginal costs, the Thompson Division will have competitive
advantage $288. The out-of-pocket cost from the Thompson Division is $120 and
from the Southern Division is $168. As a result, the Northern Division would
choose the Thompson Division. The Birch Paper Company can not only minimize
3. Evaluating the Northern Division bid options: it can receive $480 from the
Thompson Division, $430 from West Paper Company and $432 from Eire
Papers, Ltd; but Eire Papers purchases from outside liners which are the
Birch is $391. Based on the market rate transfer price, the Northern Division
would choose the bid from Eire Papers Ltd. $391. Using market based
transferring price, it allows the Birch Paper Company determine the true market
value and also allow each division observe its performance and reduce
misallocation resources.