Birch Paper Company Case Study Solutions

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1. Calculating all three options based on costs Thompson Division Costs Linerboard and corrugating medium 168(70%*400)*60% 30% of out of pocket costs 120(30%*400) Total 288 West Papers Costs Total 430 Eire Papers Costs Outside linear(Southern div) 54(60%*90) Printing(Thompson div) 25 Own Supplies 312(432-5-36) Total 391 As shown in the calculations above, Northern should accept the bid from Thompson division as it has the lowest cost if all transfer prices within the company were calculated at costs. Incurring the lowest costs would also enable Birch Paper Company to earn the highest profits possible. 2. As alternatives for sourcing exists, Mr. Kenton should be permitted to choose the alternative that is in Northern division's own…show more content…
it is apparent that each division is trying to maximize its own profit by posting a high mark-up for its output; with Thompson Division posting 20% on top of its out-of pocket cost and Southern’s 40%. With this set up, it is also obvious that without top management’s intervention, Northern will buy boxes from West Paper because the latter had the lowest bid price. If this will happen, the Company’s ultimate goal of maximizing its profits will not be attained. The operations of the two other divisions (Thompson and Southern) will not be maximized when there is already an opportunity. There will be high opportunity loss for the other two divisions. The company as a whole will have to shoulder for the cost of design and development work incurred by Thompson’s package design and development staff.

However, if Northern gets boxes from Thompson, operating capacity of Thompson will be maximized and excess inventory of Southern will be utilized. Only that, a transfer price should be set. Thompson will still realize profit even if it lowers down its price at West Paper’s offer of $430. Southern Division as well could lower down the price of its linerboard for Thompson. With the company’s adoption of a transfer pricing system, all these concerns will be addressed. Thompson division need not charge the full 20% of its overhead cost if it is not
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