Company Background Birch Paper Company is a medium-sized, vertically integrated paper company, producing white and kraft papers

and paperboard. It has four producing divisions and a timberland division which supplied part of the company pulp requirement; each division is operating independently headed by its respective division managers. Birch division managers normally were free to buy materials or inputs from whichever supplier they wished, and even on sales within the company; so divisions were expected to meet the going market price if they wanted the business. Early in the year, its Northern Division designed a special retail display box in conjunction with the Thompson Division, which was equipped to make the box. Thompson, as one of Birch four producing divisions converted paperboard output into corrugated boxes. It also printed and colored the outside surface of the boxes. Birch Southern Division will supply the lineboard and corrugating medium to Thompson Division in the event the latter got the order from Northern. Decentralization Policy The Company observes the practice of decentralization where the responsibility and authority in all decision-making for the divisions operations lie in its respective division managers, except those relating to overall company policy. For several years, top management felt that the decentralization concept had been successfully applied and that the company profits and competitive position had definitely improved.

Performance Evaluation Each division performance had been judged on the basis of its profit and return on investment for several years. The said practice creates competition among the company divisions because each makes sure that it is more profitable than the others. As such was the case, there was high possibility that one division was enjoying profit at the expense of the other(s). Cost Structure There was no defined cost structure set by top management for each division. For Northern retail display box project in conjunction with Thompson, the two had only an informal agreement that the former had to reimburse the latter of the out-of-pocket cost of its design and development work.

Thompson bid price of $480 for Northern box requirement had a mark-up of 20% and Southern mark-up for its liner and corrugating medium for Thompson was at around 40% considering that its out-of-pocket costs were about 60% only of its selling price. The Controller comment on the effect that costs that were variable for one division could be largely fixed for the company as a whole is true. Answer to case study 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 isnt 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 policy. Question 4 In the controversy, how, if at all, is the transfer price system dysfunctional? Answer: To an extent yes The transfer price system is dysfunctional because it focuses too much on individual sectors making profit and return on investment. Some alternative should be present which strikes a balance between both.