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Birch Paper Company

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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 solutions to the immediate issue?
The method of using transfer price helps decide whether to in source if the selling profit center can sell all of its products to either insiders or outsiders and if buying center can obtain all of its requirements from either outside or insiders. The market price then represents the opportunity costs to the seller of selling the product inside. In this

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