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BIRCH PAPERBIRCH PAPERCOMPANYCOMPANY
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GROUP MEMBERSGROUP MEMBERS
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BACKGROUNDBACKGROUND
Medium sized, partly integrated companyMedium sized, partly integrated company
3 products3 products--white and Kraft papers and paperboardwhite and Kraft papers and paperboard
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Working & AssessmentWorking & Assessment
Judgment based on profit and return onJudgment based on profit and return oninvestment(ROI)investment(ROI)
Concept of decentralizationConcept of decentralization--both authority andboth authority and
responsibilityresponsibility
Improvement attributed to above factorImprovement attributed to above factor
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SITUATIONSITUATION Northern and Thompson divisions togetherNorthern and Thompson divisions together
designed box for Northern divisiondesigned box for Northern division
Thompson division was reimbursed by northernThompson division was reimbursed by northerndivision for its designing and development.division for its designing and development.
After finalization, apart from Thompson's bid itAfter finalization, apart from Thompson's bid italso get offers from two outside companies.also get offers from two outside companies.
Company policy where each division managerCompany policy where each division managerhad full freedom and discretion to buy fromhad full freedom and discretion to buy fromanywhere .anywhere .
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SITUATIONSITUATION Thompsons most materials from within company,Thompsons most materials from within company,
but sales mostly to outsiders.but sales mostly to outsiders.
If Thompson gets bid Materials to be procuredIf Thompson gets bid Materials to be procuredfrom southern division.from southern division.
70% of out of pocket costs of $400 were of above70% of out of pocket costs of $400 were of above
materialsmaterials This constituted 60% of selling priceThis constituted 60% of selling price
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BIDS(per 1000)BIDS(per 1000)
Thompson - $480
West Paper Company - $432
Eire Paper Company - $430*
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*Eire paper company and dilemma*Eire paper company and dilemma It would buy outside linear board from birch withIt would buy outside linear board from birch with
special printing(to be done by Thompson) @ aspecial printing(to be done by Thompson) @ acost of $90(per thousand) and $30 for printing.cost of $90(per thousand) and $30 for printing.
Competitive market where higher costs cannot beCompetitive market where higher costs cannot bepassed on, how can we buy our own supplies @passed on, how can we buy our own supplies @
10% higher than market rate.10% higher than market rate.
--William KentonWilliam Kenton
(Manager, Northern division)(Manager, Northern division)
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Other factorsOther factors Thompson division felt not received profit forThompson division felt not received profit for
their development work, hence entitled to marktheir development work, hence entitled to mark
up on production of box.up on production of box. Costs variable for one division could be largelyCosts variable for one division could be largely
fixed for company as a wholefixed for company as a whole
Without orders from top management KentonWithout orders from top management Kentonwould accept the lowest bid.would accept the lowest bid.
Transactions involved only 5% of volume ofTransactions involved only 5% of volume ofdivisions involved.divisions involved.
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Which bid should northern divisionWhich bid should northern division
accept that is in best interest of theaccept that is in best interest of thecompany?company? Thompson divisionThompson division; even though the bid from; even though the bid fromWest Paper seems at first to be the best choice.West Paper seems at first to be the best choice.
In you calculate out the cost you find thatIn you calculate out the cost you find thatThompson actually has the lowest costsThompson actually has the lowest costsassociated with them.associated with them.
(intricacies involved)(intricacies involved)
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Costs involvedCosts involved Costs for Thompson are a:Costs for Thompson are a: LinearboardLinearboard andand
corrugating medium: Cost $400x70%*60%=corrugating medium: Cost $400x70%*60%=
$168 plus Out of Pocket: $400x30%=120, for a$168 plus Out of Pocket: $400x30%=120, for atotal cost of $288.total cost of $288.
Costs forWest Papers would be a total of $430Costs forWest Papers would be a total of $430
costs for Eire Papers would be $90x60%= $54costs for Eire Papers would be $90x60%= $54(Southern) plus $25 (Thompson), and their(Southern) plus $25 (Thompson), and theirsupplies of $432supplies of $432--55--36= $312 for a total of $391.36= $312 for a total of $391.
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Should Mr.kenton accept this bid?Should Mr.kenton accept this bid? Mr. Kenton should not accept the bid from WestMr. Kenton should not accept the bid from West
because it isnt in the best interest of thebecause it isnt in the best interest of the
company, but at the same time with the transfercompany, but at the same time with the transferpolicy that exists,policy that exists, it is really up to him what isit is really up to him what isin the best interests of his division.in the best interests of his division. I believe heI believe heshould accept the bid from Thompson becauseshould accept the bid from Thompson because
not only will it result in the lowest cost, but also itnot only will it result in the lowest cost, but also itwill encourage buying from within the company.will encourage buying from within the company.
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Vice president any action?
Vice president any action?
Yes. As if no orders come from top managementYes. As if no orders come from top managementKenton would accept the lowest bidKenton would accept the lowest bid
The vice president of Birch should take action inThe vice president of Birch should take action inorder to remedy the overall problems associatedorder to remedy the overall problems associatedwith this transfer pricing policy.with this transfer pricing policy.
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Is transfer pricing systemIs transfer pricing system
dysfunctional?dysfunctional? To an extentTo an extent -- yes.yes.
The transfer price system is dysfunctionalThe transfer price system is dysfunctional
because it focuses too much on individual sectorsbecause it focuses too much on individual sectorsmaking profit and return on investment.making profit and return on investment.
Some alternative should be present which strikesSome alternative should be present which strikesa balance between both.a balance between both.
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THANK YOUTHANK YOU