...Birch Paper Company Relevant Information & Equations 1) Birch Paper Company is a producer of paper, paperboard, and corrugated boxes. The company is integrated, consisting of four separate production divisions. One of its divisions, Northern Division, asked for bids on a special corrugated box. It requested bids from one of its sister division (Thompson Division) and from two outside companies. The issue at hand is whether Northern should accept a bid from its sister division or from one of the outside companies. It should be noted that Thompsons bid is substantially higher than the bids received from the outside company. Relevant information pertaining to the three bids are provided below. 2) Thompson Division a) Bid $510 per 1000 boxes b) Thompson is marking the product up by 24.5% for a profit of $100. - $410 x 24.5% = $510 per 1000 boxes c) Thompson’s out of pocket expenses per 1000 boxes amount to $410 - 75% or $307.50 of the $410 represents the cost of linerboard and corrugating medium which will be purchased from its sister division Southern. That leaves $102.50 remaining and designated to other out of pocket costs per 1000 boxes. - $410 x 75% = $307.50; $410 - $307.50 = $102.50 out of pocket costs per 1000 boxes. d) If Thompson gets the order from Northern it will buy its linerboard and corrugating medium from the Southern Division of Birch. - Southern’s out of pocket costs for both liner and corrugating medium were about 65% of its...
Words: 712 - Pages: 3
...Birch Paper Company Internal Environmental Analysis What they do? – Birth Paper Company is a medium sized, partly integrated paper company, producing white and kraft papers and paperboard. They also convert paperboard into corrugated boxes with printing and colour on the outside surface. Where they operate? – Birch operates 4 production divisions for paper, paperboard, and corrugated boxes as well as a timberland division to supply part of the company’s pulp requirements. How well are they doing? – The company’s profit and competitive position has improved in the last few years since decentralization of profit responsibility. Divisions appear to be doing well in their respective markets: • Southern division runs below capacity at times and has excess inventory, but market price has not noticeably weakened as a result of oversupply. • Thompson Division is in a position to bid full-cost quotations to improve the quality of their business. Key Players • James Brunner, manager of Thompson Division which produces corrugated boxes. • William Kenton, manager of Northern Division (designed specialty display box in conjunction with Thompson Division). • Manager of Southern Division (produces and could potentially supply Thompson with linerboard and corrugating medium for specialty boxes). • Commercial Vice President (analyzing the cost structures of the various divisions). External Environmental Analysis/Industry Analysis Competitors –...
Words: 1528 - Pages: 7
...Birch Paper Company * Is a medium sized, partly integrated company * Three products, white and Draft papers and paperboard * The company is decentralized- both authority and responsibility * Seems like most of their decisions are based on profits and ROI * Northern and Thompson division together designed box for Northern division * Thompson division was reimbursed by Northern division for it’s designing and development * Apart from Thompson’s bid they also get two different offers from outside companies * Company policy where each division manager had full freedom and discretion to buy from anywhere * Thompson’s most materials from within company but sales mostly outsiders * If Thompson get bid, materials to be procured from Southern division * 70% of out of pocket costs of $400 were above materials * This constituted 60% of selling price * The Northern division received bids on 1000 boxes: - Thompson division- $480 - West Paper Company- $430 - Eire Paper Company- $432 * Eire paper Company dilemma: -Purchase (1000 boxes) outside linear board from Birch with special printing from Thompson at $90 plus $30 for printing -“Competitive market where higher costs cannot be passed on, how can we buy own supplies at 10% higher than market rate?” * Thompson division felt they didn’t receive profit for their development work, so they marked up cost on production of the box * Team 1 assessment that Northern division should...
Words: 268 - Pages: 2
...Birch Paper Company Question 1 Which bid should Northern Division on accept that is in the best interests of Birch paper company? Answer: Thompson division even through the bid from west paper seems at first to be the best choice. In you calculate out the cost you find that Thompson actually has the lowest costs associated with them. Cost involved: ✓ Costs for Thompson are a:Linearboard and corrugating medium: cost $ 400x 70% * 60% - $168 plus out of pocket: $400x 30% = 120, for a total cost of $ 288. ✓ Cost for west papers would be a total of $ 430. ✓ Cost for Eire papers would be $ 90x 60% - $ 54 (Southern) plus $ 25 (Thompson), and their supplies of $ 432 – 5 - 432 = $ 312 for a total of $ 391. Question 2 Should Mr. Kenton accept this bid? Why or why not? Answer: Mr. Kenton should not accept the bid from west because it isn’t in the best interest of the company, but at the same time with the transfer policy that exists, it is really up to him what is in the best interests of his division. I believe he should accept the bid from Thompson because not only will it result in the lowest cost, but also it will encourage buying from within the company. Question 3 Should the vice president of Birch paper company take any action? Answer: Yes. As if no orders come from top management Kenton would accept the lowest bid. The vice president of Birch should take action in order to remedy the overall problems associated with this transfer pricing...
Words: 465 - Pages: 2
...GOA INSTITUTE OF MANAGEMENT Birch Paper Company Submitted by, Chandra Mouli Kavi Section C Roll no. 2010132 1. What is the immediate economic impact to the company of sourcing the product to either WEST PAPER or EIRE? Mr. William Kenton, manager of the Northern Division, should be permitted to choose the alternative that is in Northern division's own interests. The transfer price policy gives him the right to deal with either insiders or outsiders at his discretion. If he is unable to get a satisfactory price from the inside source, which is Thompson division, he should be free to buy from outside. The three bids from Thompson division, West Paper Company and Eire Paper Company are $480, $430 and $432 respectively. Below mentioned are the costs involved while taking Thompson division, West Paper Company and Eire Paper Company into consideration. a) Costs for Thompson division Linearboard and corrugating medium : $400 x 70% x 60% = $168 Out of Pocket Total Cost : $400x30%=120 : $288 b) Costs for West Papers = $430 c) Costs for Eire Papers Outside Linear (Southern) Printing (Thompson division) Own Supplies Total Cost : $90x60%= $54 : $25 : $312 : $391 Since all the transfer prices in the company are calculated at costs, the Northern Division should accept the bid for Thompson division as it has the lowest costs. Accepting the bid based on lowest costs would also enable Birch Paper Company to earn the highest profits available. 2. What are the possible...
Words: 1004 - Pages: 5
...Birch Paper Case 3 General ways a decentralized firm can handle transfer pricing 1) Direct intervention by top management - If this were an extraordinarily large order or if internal transfers were rare, this would be the best solution…but this order represents less than 5% of the volume of all divisions involved. - The disadvantage of direct intervention is that top management could become swamped with pricing disputes, and individual division managers lose the flexibility and other advantages of autonomous decision making. 2) Centrally established transfer price policies - Externally based market prices are generally considered the best basis for transfer pricing when a competitive market exists for the product and market prices are readily available. - A drawback is that this method may require a change to the compensation/incentive system of Division managers Market price-based transfer pricing – A policy that sets transfer price at the market price or a small discount from the market price. From the company’s perspective, this is fine as long as the supplying unit is operating at capacity. Cost basis policy – A seller operating below capacity should transfer at the differential cost of production (variable cost). A seller operating at capacity should transfer at the market price. A seller operating below capacity is indifferent between providing the product and receiving a transfer price equal to the seller’s differential outlay cost or not providing...
Words: 678 - Pages: 3
...of suppliers. In this instance, Eire Paper would be the ideal choice as its price per thousand boxes is lowest at $430. Managers are graded on division profits, not company wide. The incentive scheme needs to be set up as to benefit the Thompson Division, since their profits will be lower. The bid from the Thompson division is in the best interest of Birch Paper Co. Since the Thompson division is a part of the Birch Paper Co., buying from them leads to less money coming from out of their pocket. Even though the price is technically higher, the actual cost is lower because a portion of the money stays in the company and is not part of their out of pocket costs. As a result, the company as a whole is more profitable. Lead time is also a factor to acknowledge, as Birch Paper Co would be able to purchase the products sooner, track the products easier, and receive the products in a timely fashion. If they were to outsource, this would not be the case. The VP should intervene in the situation because the company’s profitability is at stake. If the VP would not intervene then top management would accept the lowest bid, although the lowest bid does not benefit the company as a whole. While this example is less than 5% of total volume, the reason the VP needs to intervene is because it could have adverse effects in the future if similar issues arise between division profits versus company profits. By hiring the Thompson division, the company as a whole saves money even though the...
Words: 308 - Pages: 2
...Karen- Kimberly-Clark Case Study In 1872 four business men, John Kimberly, Havilah Babcock, Charles Clark and Frank Shattuck created a company called Kimberly, Clark and Company which initially sold manufactured paper goods. They would eventually branch out into personal care items in order to compete in a larger market with companies like Proctor and Gamble. In 1978, Kimberly-Clark introduced Huggies disposable diapers and were an instant success. In the mid 1990’s Kimberly-Clark merged with Scott Paper and found them in an unusual predicament, the merger did not go well, the integration of Scott and Kimberly-Clark was a rocky one that would lead to dissatisfaction on the part of most Scott employees and especially Scott’s senior management.[1] In 2002, Proctor and Gamble released a line of high end Pampers disposable diapers that not only was a substitute for Huggies, but also captured a large portion of Huggies market share. Around 2003, Kimberly-Clark decided to restructure the way that the company focused on business products. They chose to use a system of “grow, sustain and fix”, which split all products in to areas that needed growth, needed to sustain market share or items that needed to be reformulated. This system was a total failure and caused the company to take several steps back in market share in most of their areas.[2] Had Kimberly-Clark gone for a more product related divisional structure, it is possible that they would not have lost so much of its...
Words: 1103 - Pages: 5
...Birch Case--summary Background: Birch Paper Company is a large and vertically integrated paper company. It has three products: white paper, Kraft paper and paperboard. The company has four producing divisions and a timberland division (supplies pulp). Each division is operated by its manager independently, and each of them is assessed based on its profit and return on investment. A decentralizing policy has been applied by top management, which has increase corporate profits and competitive position. Situation: Thompson division designed a box for Northern division. Each box includes three parts: an inside linerboard, an outside linerboard, and the corrugating medium. Northern division paid for Thompson only the out of pocket cost of its design and development work. After that, Northern has three offers from Thompson and other two outside companies West and Erie. Usually, managers have rights to choose suppliers of materials freely, and may get sales price inside Birch. There are three bids: 1) The bid from Thompson is $480. If Thompson gets the offer, it will buy most of materials from inside Birch. These materials will cost 70% of out-of-pocket costs of $400, and is equivalent to 60% of selling price. 2) The bid from Eire Paper is $430. If Eire gets the offer, it will purchase the outside linerboard from Birch and use its own inside linerboard and corrugating medium. The outside linerboard will cost $120 a gross ($90 is the material from Southern division and $30 is...
Words: 318 - Pages: 2
...The Birch Paper Case This case was about the decision that Mr. William Kenton, the manager of the Northern division of the Birch Company had to make regarding the purchase of specialty boxes. Mr. Kenton had received three bids. The first was from the Thompson division of the Birch Company for the amount of $512 per thousand boxes, the second was from West Paper Company in the amount of $460 per thousand boxes, and the last was from Eire Paper Company in the amount of $442 per thousand boxes. Now the task for Mr. Kenton was to choose the offer that was in the best interest of the company. At first glance it would seem that the bid that should be accepted is the one made by Eire Paper Company because it was the lowest bid and had more room for profitability. Although the Eire Paper Company had the lowest bid if we evaluated the bid based on cost it would be as follows. The Thompson division would be $168($400 * 70%)* 60% added to $120($400 * 30%) to make it $288 of out of pocket cost, West Paper Company would be $460, and Eire Paper Company’s would be $401($442-$5-$36). The bid that would have been in the best interest of the Birch Company, if the divisions weren’t considered separate financial entities, is one from the Thompson Division. However, the Thompson division has its own goals in the company and accepting its bid would not be profitable for the Northern division. Since all the divisions of the Birch Company are judged on their own merits the Northern division and...
Words: 367 - Pages: 2
...Homework – Birch Paper Company 1) Fill in the missing prices and costs on the “Diagram of the alternatives” and “Costs of the alternatives” which are attached. On the “Diagram of the alternatives”, fill in the amounts indicated in the nine dotted ovals. Some amounts may be easy to find in the case, some will need to be computed from case information, and some you will not be able to ascertain from case data; for the latter, write “don’t know”. On the “Costs of the alternatives”, complete the table using relevant amounts from the “Diagram of the alternatives”, and compute the net cost to Birch for each of the three choices. NOTE: In the case, the term “out-of-pocket costs” means variable costs. 2) On your completed “Diagram of the alternatives”, indicate which bid Mr. Kenton (Northern Division) will accept (based purely on economic considerations) by circling it and labeling it accordingly. 3) On your completed “Costs of the alternatives”, indicate which alternative is in the best interest of Birch Paper as a whole (based purely on economic considerations) by circling it and labeling it accordingly. Section: D Name: Amanda Wang Section: D Name: Amanda Wang 9) 9) 8) 8) 6) 6) 5) 5) 4) 4) 2) 2) 1) 1) 7) 7) 3) 3) 280 120 280 120 90 don’t know 90 don’t know 30 25 30 25 480 480 TP: $ (market price) TP: $ (full cost) Price: $ Price: $ Price: $ VC: $ NORTHERN (William...
Words: 466 - Pages: 2
...[pic] PROGRAMA DE CONTROL DE GESTION |CASO: | | | | | |“Birch Paper Company” | | | | | | | | | | | | ...
Words: 1246 - Pages: 5
...Birch Paper Company Birch Paper Company Question 1 Which bid should Northern Division on accept that is in the best interests of Birch paper company? Answer: Thompson division even through the bid from west paper seems at first to be the best choice. In you calculate out the cost you find that Thompson actually has the lowest costs associated with them. Cost involved: ✓ Costs for Thompson are a:Linearboard and corrugating medium: cost $ 400x 70% * 60% - $168 plus out of pocket: $400x 30% = 120, for a total cost of $ 288. ✓ Cost for west papers would be a total of $ 430. ✓ Cost for Eire papers would be $ 90x 60% - $ 54 (Southern) plus $ 25 (Thompson), and their supplies of $ 432 – 5 - 432 = $ 312 for a total of $ 391. Question 2 Should Mr. Kenton accept this bid? Why or why not? Answer: Mr. Kenton should not accept the bid from west because it isn’t in the best interest of the company, but at the same time with the transfer policy that exists, it is really up to him what is in the best interests of his division. I believe he should accept the bid from Thompson because not only will it result in the lowest cost, but also it will encourage buying from within the company. Question 3 Should the vice president of Birch paper company take any action? Answer: Yes. As if no orders come from top management Kenton would accept the lowest bid. The vice president of Birch should take action in order to remedy the overall problems associated with...
Words: 316 - Pages: 2
...Pertanyaan : 1. Tawaran manakah yang harus diterima oleh Divisi Northen yang paling memenuhi kepentingan Birch Paper Company? 2. Apakah Kenton harus menerima tawaran ini? Mengapa ya dan mengapa tidak? 3. Haruskah wakil presiden Birch Paper Company melakukan suatu tindakan? 4. Dalam kontroversi yang telah dijelaskan sebelumnya, bagaimana system harga transfer dapat menjadi disfungsional? Apakah permasalahan tersebut membutuhkan adanya perubahan dalam kebijakan penentuan harga transfer perusahaan secara keseluruhan? Jika ya, perubahan spesifik apakah yang Anda sarankan? Jawaban : 1. Tawaran manakah yang harus diterima oleh Divisi Northen yang paling memenuhi kepentingan Birch Paper Company? Jawab : Seharusnya tawaran yang harus diterima oleh Divisi Northen yang paling memenuhi kepentingan Birch Paper Company adalah tawaran dari Divisi Thompson sebesar $480 per ribuan unitnya meskipun tawaran dari West Paper Company lebih murah daripada Divisi Thompson, yaitu sebesar $430 per ribuan unitnya. Memang kelihatannya secara kasar hal ini dapat merugikan Divisi Northen karena harga kotaknya lebih mahal daripada luar divisi, akan tetapi, jika dianalisis, sebenarnya Divisi Thompson memiliki biaya terendah dalam divisi mereka, yaitu sebagai berikut. Biaya Divisi Thompson adalah sekitar 70% pengeluaran Thompson sebesar $400 berasal dari biaya lineboard dan corrugating medium. Biaya untuk lineboard dan corrugating medium adalah sebesar 60% dari harga jual. Maka, 70%...
Words: 653 - Pages: 3
... Case SUMMARY Division A of Lambda Company manufactures product X, which is sold to Division B as a component of product Y. Product Y is sold to Division C, which uses it as a component of Product Z. Product Z is also sold to customers outside of the Company. The intracompany pricing rule is that product are transferred between divisions as standard cost plus 10 percent return on inventories and fixed assets. Case Questions Question a: with transfer price calculated in Problem 1, is Division C better advised to maintain its price at $28 or follow competition in each of the instances above? Answer: Under possible competitive price $27.00 If company maintain the price at $28, the profit=(28-23.6) ×9,000=39,600 If company follow the possible competitive price at $27, the profit= (27-23.6) ×10,000=34,000 Under possible competitive price $26.00 If company maintain the price at $28, the profit=(28-23.6) ×7,000=30,800 If company follow the possible competitive price at $26, the profit= (26-23.6) ×10,000=24,000 Under possible competitive price $25.00 If company maintain the price at $28, the profit=(28-23.6) ×5,000=22,000 If company follow the possible competitive price at $25, the profit= (25-23.6) ×10,000=14,000 Under possible competitive price $23.00 If company maintain the price at $28, the profit=(28-23.6) ×2,000=8,800 If company follow the possible competitive price at $23, the profit= (23-23.6)...
Words: 1977 - Pages: 8
