c




 

What bid should Mr. Kenton accept?

Mr. Kenton should accept $430 as a bid when we he views this decision to only
maximize the division¶s profits. The basic premise here would be that any division
should have the main target of reducing its costs.
He can also consider the bid of $432 as it would increase the profits of the Birch Paper
Company by a higher magnitude than the $ 2 extra price than they would be paying.
The profit would be $ 5 + $ 36(40% of margin of $ 90) = $ 41.
Thus he can also consider the price of $ 432 from Eire Papers because it would increase
the Birch¶s profits without affecting Northern Division results considerably.

Which bid is in the best interest of Birch Paper Company?

The best bid in the interest of Birch paper Company is $ 480 bid by Thompson
Division, this would help in retaining the $ 112 (Southern Division profit) + $ 48 = $
160-41( the profit that would otherwise had been made by Birch if it would accepted the
$ 432 bid) = $ 121 in the Birch Compa ny which otherwise would have been taken by
some other company.
Southern Division¶s Profit + Thompson¶s Profit Less : Otherwise retained if $ 432 bid
was accepted = Total Amount Retained Back
112 48 41 121

Should the commercial VP intervene? If so, how?

Yes VP should intervene.

The policy can be put regarding the transfer pricing which would be based on the
opportunity cost of the divisions. If the divisions is operating at full capacity then the
opportunity cost would be the market price that the division is charging for its products
and if the division is operating at less than the full capacity and order fulfilment can be
achieved at less than the capacity than the opportunity cost should be the variable cost
of producing the extra units. This would help is reducing the cascading effect of
overpricing the inputs to each other and rather would be based on the opportunity cost
involved.





 




Case 6-2: Birch Paper Company

1. Which bid should Northern Division accept that is in the best interests of Birch Paper
Company?

Northern Division should accept the bid of the Thompson division even though 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. Costs for
Thompson are as follows: Linearboard and corrugating medium: Cost $400x70%= $168
plus Out of Pocket: $400x30%=120 for a total cost of $288.Costs for West Papers
would be a total of $430, and costs for Eire Papers would be $90x60%= $54 (Southern)
plus $25 (Thompson), and their supplies of $432-5-36= $312 for a total of $391.
2. Should Mr. Kenton accept this bid? Why or why not?
Mr. Kenton should not accept the bid from West because it isn¶t 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.

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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.
3. Should the vice president of Birch Paper Company take any action?

The vice president of Birch should take action, but not against just this division. I think
he needs to take action in order to remedy the overall problems associated with this
transfer pricing policy. If needed top management is able to order the acceptance of
another bid.

4. In the controversy described, how, if at all, is the transfer price system dysfunctional?
Does this problem call for some change, or changes, in the transfer pricing policy of the
overall firm? If so, what specific changes do you suggest?

The transfer price system is dysfunctional because it focuses too much on individual
sectors making profit and return on investment. It should focus on success and profit for
the overall company not just individual profit. Each division...