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BIRCH PAPER COMPANY

Q>1 Selection of Bid by Northern Division


Bids Per thousand units
Thompson $480.00
West Paper Company $430.00
Eire Papers Ltd $432.00

Thompson Division Costs


Total out-of-pocket Cost $400.00
Cost of linerboard & Corrugated medium $280.00
Overhead & Profit charge $80.00

Southern Division
Selling price $280.00

Cost of Liner & corrugating medium for Southern


Division $168.00
Profit for Southern Division $112.00
Total Profit $192.00
Total cost $288.00

Eire Papers Ltd Offer


Outside Liner Board price (from Southern
division) $90.00
Cost for Southern Division $54.00
Profit for Southern Division $36.00
Printing price (from Thompson) $30.00
Out-of-pocket Cost for printing for Thompson $25.00
Profit for Thompson $5.00
Cost of supplies from Eire Papers Ltd. $391.00
Total Cost $470.00

West Paper Company $430.00

Selection of Thompson Bid is in best interests of Birch Paper Company

Q>2 Acceptance of Bid by Mr Kenton


Mr Kenton might accept the lowest bid from West Paper Company for divisional profits
& ROI but it is not in best interests of the Birch paper Company. Thompson bid offers
lowest cost & encourages buying within the company

Q>3 Action by Vice-President


If top management does not take any action then Mr Kenton might accept the lowest bid
since transfer policy allows him to select any source.

Q>4 Transfer Price System


Transfer price system is dysfunctional since it encourages focus only on individual
divisional profits and return for investment. The individual division performance goals
should be aligned to organisation level objectives & profitability

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