mcs - BIRCH PAPER COMPANY

8/7/2019 mcs - BIRCH PAPER COMPANY

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BIRCH PAPERBIRCH PAPERCOMPANYCOMPANY


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GROUP MEMBERSGROUP MEMBERS


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BACKGROUNDBACKGROUND

Medium sized, partly integrated companyMedium sized, partly integrated company

3 products3 products--white and Kraft papers and paperboardwhite and Kraft papers and paperboard


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Working & AssessmentWorking & Assessment

Judgment based on profit and return onJudgment based on profit and return oninvestment(ROI)investment(ROI)

Concept of decentralizationConcept of decentralization--both authority andboth authority and

responsibilityresponsibility

Improvement attributed to above factorImprovement attributed to above factor


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SITUATIONSITUATION Northern and Thompson divisions togetherNorthern and Thompson divisions together

designed box for Northern divisiondesigned box for Northern division

Thompson division was reimbursed by northernThompson division was reimbursed by northerndivision for its designing and development.division for its designing and development.

After finalization, apart from Thompson's bid itAfter finalization, apart from Thompson's bid italso get offers from two outside companies.also get offers from two outside companies.

Company policy where each division managerCompany policy where each division managerhad full freedom and discretion to buy fromhad full freedom and discretion to buy fromanywhere .anywhere .


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SITUATIONSITUATION Thompsons most materials from within company,Thompsons most materials from within company,

but sales mostly to outsiders.but sales mostly to outsiders.

If Thompson gets bid Materials to be procuredIf Thompson gets bid Materials to be procuredfrom southern division.from southern division.

70% of out of pocket costs of $400 were of above70% of out of pocket costs of $400 were of above

materialsmaterials This constituted 60% of selling priceThis constituted 60% of selling price


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BIDS(per 1000)BIDS(per 1000)

Thompson - $480

West Paper Company - $432

Eire Paper Company - $430*


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*Eire paper company and dilemma*Eire paper company and dilemma It would buy outside linear board from birch withIt would buy outside linear board from birch with

special printing(to be done by Thompson) @ aspecial printing(to be done by Thompson) @ acost of $90(per thousand) and $30 for printing.cost of $90(per thousand) and $30 for printing.

Competitive market where higher costs cannot beCompetitive market where higher costs cannot bepassed on, how can we buy our own supplies @passed on, how can we buy our own supplies @

10% higher than market rate.10% higher than market rate.

--William KentonWilliam Kenton

(Manager, Northern division)(Manager, Northern division)


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Other factorsOther factors Thompson division felt not received profit forThompson division felt not received profit for

their development work, hence entitled to marktheir development work, hence entitled to mark

up on production of box.up on production of box. Costs variable for one division could be largelyCosts variable for one division could be largely

fixed for company as a wholefixed for company as a whole

Without orders from top management KentonWithout orders from top management Kentonwould accept the lowest bid.would accept the lowest bid.

Transactions involved only 5% of volume ofTransactions involved only 5% of volume ofdivisions involved.divisions involved.


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Which bid should northern divisionWhich bid should northern division

accept that is in best interest of theaccept that is in best interest of thecompany?company? Thompson divisionThompson division; even though the bid from; even though the bid fromWest Paper seems at first to be the best choice.West Paper seems at first to be the best choice.

In you calculate out the cost you find thatIn you calculate out the cost you find thatThompson actually has the lowest costsThompson actually has the lowest costsassociated with them.associated with them.

(intricacies involved)(intricacies involved)


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Costs involvedCosts involved Costs for Thompson are a:Costs for Thompson are a: LinearboardLinearboard andand

corrugating medium: Cost $400x70%*60%=corrugating medium: Cost $400x70%*60%=

$168 plus Out of Pocket: $400x30%=120, for a$168 plus Out of Pocket: $400x30%=120, for atotal cost of $288.total cost of $288.

Costs forWest Papers would be a total of $430Costs forWest Papers would be a total of $430

costs for Eire Papers would be $90x60%= $54costs for Eire Papers would be $90x60%= $54(Southern) plus $25 (Thompson), and their(Southern) plus $25 (Thompson), and theirsupplies of $432supplies of $432--55--36= $312 for a total of $391.36= $312 for a total of $391.


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Should Mr.kenton accept this bid?Should Mr.kenton accept this bid? Mr. Kenton should not accept the bid from WestMr. Kenton should not accept the bid from West

because it isnt in the best interest of thebecause it isnt in the best interest of the

company, but at the same time with the transfercompany, but at the same time with the transferpolicy that exists,policy that exists, it is really up to him what isit is really up to him what isin the best interests of his division.in the best interests of his division. I believe heI believe heshould accept the bid from Thompson becauseshould accept the bid from Thompson because

not only will it result in the lowest cost, but also itnot only will it result in the lowest cost, but also itwill encourage buying from within the company.will encourage buying from within the company.


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Vice president any action?

Vice president any action?

Yes. As if no orders come from top managementYes. As if no orders come from top managementKenton would accept the lowest bidKenton would accept the lowest bid

The vice president of Birch should take action inThe vice president of Birch should take action inorder to remedy the overall problems associatedorder to remedy the overall problems associatedwith this transfer pricing policy.with this transfer pricing policy.


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Is transfer pricing systemIs transfer pricing system

dysfunctional?dysfunctional? To an extentTo an extent -- yes.yes.

The transfer price system is dysfunctionalThe transfer price system is dysfunctional

because it focuses too much on individual sectorsbecause it focuses too much on individual sectorsmaking profit and return on investment.making profit and return on investment.

Some alternative should be present which strikesSome alternative should be present which strikesa balance between both.a balance between both.


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THANK YOUTHANK YOU

Date post:	08-Apr-2018
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mcs - BIRCH PAPER COMPANY

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