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Eire Papers

As part of the bid tabled by Eire Papers, it would purchase outside linerboard from the Southern division as well as for printing to be carried out by the Thompson division with compensations to the 2 divisions being \$90 and \$30 respectively.

As provided in the scenario, Southern division’s sales price comprises a 60% cost component and a 40% contribution margin, this therefore amounts to 40% X \$90 = \$36 in terms of the contribution to the company. Thompson’s receipts cover its incremental costs of \$25 which therefore yields a net result of \$30 - \$25 =\$5 in terms of contributions that would be afforded to Papyrus as a whole.

The act of supplying both the linerboard and the printing service therefore allows a profit to be made by Papyrus and therefore reduces the net amount it is essentially paying for the purchase of the boxes from Eire Papers. The bid price should consequently be reduced by the amount of expected profit.

The true cost of the Erie Papers bid can therefore be derived to be in the region of \$432 - \$36 -\$5 = \$391 per thousand boxes.

Thompson

The comparable costs relative to Papyrus are calculated for all 3 bids. The 3 values reflect incremental costs to Papyrus, with Thompson having the lowest bid of \$288. This method is employed to show the relative incremental costs Papyrus will bare from each bid. (Why are we comparing costs rather than Margins?)

Thompson Total Incremental Costs to Papyrus = \$120 + \$168 = \$288
Since 70% of Thompson’s incremental costs and the total cost of linerboard and corrugating medium is \$168 (60% x 280), we find that the incremental costs to Papyrus to produce the boxes is \$288. This means that it will cost Papyrus \$288 to produce the boxes. The surplus value of \$ \$430 - \$288 = \$142 is the profit that individual departments will earn.

West Paper’s Incremental Costs to Papyrus remains as \$430. The cost is the out-of-pocket value that Northern has to pay for the boxes from West paper. The bid does not change as West paper does not provide any profit to other Papyrus Divisions.

[10:14:11 PM] Leon: Assuming that Northern is a profit centre, the best interest for Papyrus will be to consider the minimum transfer price for each bid or cost that Papyrus will bare to purchase the boxes.

The comparable costs relative to Papyrus are calculated for all 3 bids in figure… . The 3 values reflect incremental costs to Papyrus, with Thompson having the lowest bid of \$288.

Thompson Total Incremental Costs to Papyrus = \$120 + \$168 = \$288
Since 70% of Thompson’s incremental costs and the total cost of linerboard and corrugating medium is \$168 (60% x 280), we find that the incremental costs to Papyrus to produce the boxes is \$288. This means that it will cost Papyrus \$288 to produce the boxes. The surplus value of \$ \$430 - \$288 = \$142 is the profit that individual departments will earn.

West Paper’s Incremental Costs to Papyrus remains as \$430. The cost is the out-of-pocket value that Northern has to pay for the boxes from West paper. The bid does not change as West paper does not provide any profit to other Papyrus Divisions.

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