The company is a medium size and partly

integrated one and is in the business of

producing white and Kraft papers and
paperboard.

Divisions:
Northern
Southern
Third Division
Thomson Division- converts papers and paperboards
into corrugated boxes. Also prints and colors the outside
surfaces of the box.
Timberland Division

Each division had been judged independently
on the basis of its profit and return on
investment.
The companys top officials believe that
decentralized working has improved
companys profits and competitive position.

Northern Division designed a special display
box in conjugation with the Thompson
Division.
Thompson Division was reimbursed by
Northern Division for development work.

ND asked for bids on the corrugated box. The
bidders and bid prices were: (Per Thousand
Boxes)
Thompson Division: $480
West Paper Company: $430
Eire Papers Ltd: $430
As per the company policy of decentralize
working, ND may take a call to buy from West
Paper Company but calculations for overall
cost to Birch are.....

If buys from Thompson company:
For $400 out of pocket expense, 70%
represents cost of material purchased from
Southern Division, whose actual cost to SD
was 60% of selling price. Hence actual cost to
Birch for material: 400X0.7X0.6= $168
Printing and coloring cost: 400X0.3= $120
Total Cost to Birch= 168+120= $288
If buys from West paper company= $430
If buys from Eire Paper,
the Sothern Division shall sell material at price of
$90. hence earnings to SD= 90X0.4=$36
Earning to Thomson = 30-25= $5
Actual cost to Birch= 432-36-5= $391
Above two cost are significantly higher for
Birch in comparison to Thompsons actual
cost to company i.e. $288.
In absence of any specific orders from top
management, ND shall prefer buying from
lowest bidder.
Top management have to think in terms of
overall cost to the company vs. existing
policy in place.
The transaction in this case is less than 5% of
the volume of any of the division involved.
Thanks