Birch Paper Company

Birch paper company

Birch Paper Company is a medium sized, partly integrated paper company which contained four production divisions, including Thompson division, and a timberland division. Each division is encouraged to base its transfer price on the current market price and is judged independently on the basis of its profit and return on investments. After reviewing the Birch paper company case we feel that from the company perspective is to accept the Thompson bid. The Thompson bid is in the best interest of the company in terms of cash flows and long-term profit.

Questions:

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

Thompson should be accepted;

Even though the bid fromWest Paper seems at first to be the best choice.

If you calculate out the cost we find that Thompson actually has the lowest

costs associated with them

Costs for Thompson:

Linearboard and corrugating medium: Cost $400x70%*60%= $168 plus Out

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

Costs forWest Papers:

Would be a total of $430

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

Since Birch Paper Company’s responsibility structure is an investment centre as stated above, in order to maximize divisional profits Northern would chose the $288 bid from Thompson since it represents the lowest cost, thereby resulting in higher profits.

2. Should Mr.Kenton accept this bid?

Mr. Kenton should not accept the bid fromWest because it isn’t in the best interest of the company and from the above answer we can make out that West has been incurring a cost of $430, 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. 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...