1. why companies need to transfer price and advantages?2. explain the transfer pricing method that is used / can be used in this company. Explain the advantages and disadvantages? Birch Paper CompanyIf I were to price these boxes any lower than $480 a thousand, l'd be countermanding my order of last monthfor our salesmen to stop shaving their bids and to bid full-cost quotations. I've been trying for weeks to improvethe 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 wellshow a profit by putting in bids which don't even cover a fair share of overhead costs, let alone give us a profit.- James Brunner, Manager of Thompson DivisionBirch Paper Company was a medium-sized, partly integrated paper company, producing whiteand kraft papers and paperboard. A portion of its paperboard output was converted into corrugatedboxes by the Thompson Division, which also printed and colored the outside surface of the boxes.Including Thompson, the company had four production divisions and a timberland division thatsupplied part of the company's pulp requirements.For several years each division had been judged independently on the basis of its profit and returnon investment. Top management had been working to gain effective results from a policy ofdecentralizing responsibility and authority for all decisions except those relating to overall companypolicy. The company's top officials believed that in the past few years the concept of decentralizationhad been successfully applied and that the company's profits and competitive position had definitelyimproved.Early in 2002 the Northern Division designed a special display box for one of its papers inconjunction with the Thompson Division, which was equipped to make the box. Thompson's staff forpackage design and development spent several months perfecting the design, production methods,and materials that were to be used. Because of the box's unusual color and shape, these were far fromstandard. According to an agreement between the two divisions, the Thompson Division wasreimbursed by the Northern Division for the cost of its design and development work.When the specifications were all prepared, the Northem Division asked for bids on the corrugatedbox from the Thompson Division and from two outside companies. Each Birch Paper Companydivision manager normally was free to buy from whatever supplier he wished; on inter-companysales, divisions selling to other divisions were expected to meet the going market price. In 2002, the profit margins of converters such as the Thompson Division were being squeezed.Thompson, as did many other similar converters, bought the paperboard and linerboard used inmaking boxes, and its function was to print, cut, and shape the material into boxes.1 Although itbought most of its materials from other Birch divisions, most of Thompson's sales were made tooutside customers. If Thompson got the order from Northern, it probably would buy its linerboardand corrugating medium from the Southern Division of Birch. Thus, before giving its bid toNorthern, Thompson got a quote for materials from the Southern Division. Although Southern hadbeen running below capacity and had excess inventory, it quoted the prevailing market price formaterials. Southern's out-of-pocket costs for both liner and corrugating medium were about 60% ofits selling price. About 70% of Thompson's out-of-pocket costs of $400 per thousand boxesrepresented the cost of linerboard and the corrugating medium.The Northern Division received bids on the boxes of $480 per thousand from the ThompsonDivision, $430 per thousand from West Paper Company, and $432 per thousand from Eire Papers,Ltd. Eire Papers offered to buy from Birch the outside linerboard with the special printing already onit, but it would supply its own inside liner and corrugating medium. The outside liner would besupplied by the Southern Division at a price equivalent to $90 per thousand boxes, and would beprinted for $30 per thousand by the Thompson Division. Of the $30, about $25 would be out-of-pocket costs.Since the bidding results appeared to be a little unusual, William Kenton, manager of theNorthern Division, discussed the wide discrepancy in the bids with Birch's commercial vicepresident. He told the vice president, "We sell in a very competitive market, where higher costscannot be passed on. How can we be expected to show a decent profit and return on investment if wehave to buy our supplies at more than 10% over the going market?"Knowing that Mr. Brunner had been unable to operate the Thompson Division at capacity onoccasion during the past few months, it seemed odd to the vice president that Mr. Brunner wouldadd the full 20% overhead and profit charge to his out-of-pocket costs. When he asked Mr. Brunnerabout this, the answer he received was the statement that appears at the beginning of the case.Brunner went on to say that, having done the developmental work on the box and having received noprofit on that work, he felt entitled to a good markup on the production of the box itself.The vice president explored further the cost structures of the various divisions. He remembered acomment of the controller at a meeting the week before, to the effect that costs which were variablefor one division could be largely fixed for the company as a whole. He knew that in the absence ofspecific orders from top management Mr. Kenton would accept the lowest bid, which was that of theWest Paper Company for $430. However, it would be possible for top management to order theacceptance of another bid if the situation warranted such action. And although the volumerepresented by the transactions in question was less than 5% of the volume of any of the divisionsinvolved, future transactions could conceivably raise similar problems.

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1. why companies need to transfer price and advantages? 2. explain the transfer pricing method that is used / can be used in this company. Explain the advantages and disadvantages?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 2TIF

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