Transfer Pricing

Birch Paper Company

By:
Ideo Edvanditya Agritama / 141520911
Rahma Shella Resya / 141521553
Natya Nindyagitaya / 141521573
Winkly Hoetanto / 141521736

Birc
h
Pap
er
Com
pan
y
Sout
hern
Divis
ion

Nort
hern
Divis
ion
Tho
mps
on
Divis
ion

Which bid should Northern

Division accept that is in
best interests of Birch
Paper Company?

Northern Division should accept

Thompson Division for the best
interest of Birch Paper Company.
The calculation based on costs:
Thompson Division Costs Linear
board and corrugating medium
(70% x 400) x 60% = 168
Out of pocket costs 30% x 400 =
120
Total 288

West Papers Costs

Total = 430

Eire Papers Costs Outside linear

Southern division = 60% x 90 =
54
Thompson division (Printing) =
25
Own Supplies = 432-5-36 = 312
Total 391

Should Mr. Kenton

accept this bid?
Why or why not?

Facts :

$ 480 because Thompson got price

from Southern Division as $ 400.

Bruner cannot operate Thompson

Division well.

Kenton decide to choose West Paper

Companys bid.

Advice :

Northern Division should receive Division

Thompson because based on calculation in the
end Thompson Division give the lowest price.

Receiving Thompson Division will give support

to decentalization by company..

Should the vice president of Birch Paper

Company take any action?
Answer: Yes, he should. The Vice President should
take some action. If the Vice President does not
intervene, Northern Division will surely buy from
Erie Papers. Here, only Northern Division will save
$ 50 ($480 $430). However, if the Vice President
forces Thompson Division and Southern Division to
transfer the products, the company will save $ 142
($430 $288). We can see that the saving is larger
if the Northern Division chooses to accept the
transfer of products from Thompson and Southern
Division compare to buying from Erie Papers. This
amount can be then divided amongst the three
division based on their overhead costs and
sustainable profitability.

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
These problems lead to the need for
change in the pricing policy of the
company's overall transfer.
The transfer price between divisions
in the company should refer to the
market price
negotiations shall be undertaken to
determine the transfer price.
Another way of transfer pricing is
based on cost.
If there is a conflict in which the
transfer pricing in business units do not
agree to the certain prices, then do the
arbitrage.