Accounting

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Case Study on Transfer Pricing: BYRCH’S PAPER COMPANY If I were to price these boxes any lower than $480 a thousand, said James Brunner, manager of Byrch Paper Company Thompson Division, I’d be countermanding my order of last month for our salesmen to stop shaving their bids and to bid full cost quotations. I’ve been trying for weeks to improve the quality of our business, and if I turn around now and accept this job at $430 or $450 or something less than $480, I’ll be tearing down this program I’ve been working so hard to build up. The division can’t very well show a profit by putting in bids which don’t even cover a fair share of overhead costs, let alone give us a profit. Byrch Paper Company was a medium-sized, partly…show more content…
Of the $30, about $25 would be out-of-pocket costs. Since this situation appeared to be a little unusual, William Kenton, manager of the Northern Division, discussed the wide discrepancy of bids with Byrch’s commercial vice president. He told the vice president, “We sell in a very competitive market, where higher cost cannot be passed on. How can we be expected to show a decent profit and return on investment if we have to buy our supplies at more than 10% over the going market. Knowing that Mr. Brunner had on occasion, in the past few months, been unable to operate the Thompson Division at capacity, it seemed odd to the vice president that Mr. Brunner would add the full 20% overhead and profit charge to his out of pocket costs. When asked about this, Mr. Brunner’s answer was the statement that appears at the beginning of the case. He went on to say that having done the developmental work on the box, and having received no profit on that, he felt entitled to a good mark-up on the production of the box itself. The vice president explored further the cost structure of the various divisions. He remembered a comment that the controller had made at a meeting one week earlier: costs, that for one division were variable, could be largely fixed for the company as a whole. He knew that in the absence of specific orders from top management, Mr. Kenton would accept the lowest bid, which was that of the West Paper Company for $430. However, it
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