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TRANSFER PRICING: BIRCH PAPER COMPANY

Assignment #2 on-line

Birch Paper Company


Company Context:
a medium-sized, vertically integrated paper company, producing white and kraft papers and paperboard has four producing divisions and a timberland division, which supplied part of the companys pulp requirements If I were to price these boxes any lower than $480 a gross, said James Brunner, manager of Birch Paper Companys Thompson Division, Id be countermanding my order of last month for our sales force to stop shaving their bids and to bid full cost quotations. http://investing.businessweek.com/businessweek/research/s tocks/private/snapshot.asp?privcapId=9206565

Birch Paper Company


Evaluation in Decentralized System:
a policy of decentralizing responsibility for all decisions except those relating to overall company policy Birchs division managers normally were free to buy from whichever supplier they wished, and even on sales within the company, divisions were expected to meet the going market price if they wanted the business. each division is judged on the basis of its profit and return on investment it would be possible for top management to order the acceptance of another bid if the situation warranted such action.

Birch Paper Company


Northern Division designed a special retail display box for one of its finished papers in conjunction with the Thompson Division, which was equipped to make the box. Transfer Price Decision: Bids: 1) Thompson (internal) - $480.00 (20% rate)

buys from Southern division (70% of $400 cost) Southern costs are 60% of transfer/selling price

2) West Paper Co. (external) - $430.00 3) Erie Papers Inc. (external) - $432.00

Plus purchases i) $90 per box from Southern and ii) $30 from Thompson (25% is variable)

Birch Paper Company


Issues:
Transfer


Pricing

Excess capacity

Evaluation

System Responsibility Centre




Decentralized organization

Birch Paper Company


What are the additional costs to Birch Paper Company if Northern buys the boxes from West or Erie, rather than from Thompson?

Birch Paper Company


Thompson Divisional perspective: Cost Company Overall perspective: Cost (external) Thompson variable costs Southern variable costs Cost to Company $ West Paper Erie Papers Inc. 430.00 $ 430.00 $ $ $ $ $ 430.00 $ 432.00 432.00 25.00 (30.00) 54.00 (90.00) 391.00

480.00 $ $

$ $ $

120.00 168.00 288.00 $

Birch Paper Company


Does the present system motivate Mr. Brunner in such a way that actions he takes in the best interests of the Thompson Division are also in the best interests of the Birch Paper Company? Explain.

Birch Paper Company


Transfer price should allow for goal congruence profit (internal) for divisions and profit (external) for company overall In the absence of specific orders from top management, Kenton would accept the lowest bid, namely, that of West Paper for $430

Birch Paper Company What should the marketing vice president do?

Birch Paper Company


it is possible for top management to order the acceptance of another bid if the situation warranted such action the volume represented by the transactions in question was less than 5 percent of the volume of any of the divisions involved

Midterm Results
Average: 55.46/75 or 74% Hi: 72/75 or 96% Lo: 15/75 or 20% Normal Distribution of grades Comments:
Relate comments to scenario Expand discussion even with limited time and spacing Avoid dumping