Birch Paper

Numerical:

(1) Birch Paper-Transfer Pricing problem, Page 226, Book: MCS by Vijay Govindarajan & Robert N Anthony

Solution:

Facts of the case:

(a) Birch Paper Company has Products: (i) White Paper, (ii) Kraft Paper & (iii) Paper Board

(b) Division 1: Timberland, produces Pulp, which is the raw material for Birch Paper.

(c) Division 2: Thomson, produces corrugated boxes. Also does printing, colouring & production of boxes.

(d) Division 3: Northern division, produces corrugated boxes.

(e) Division 4: Southern division produces corrugated boxes.

(f) Division 5: Produces corrugated boxes.

Actual area of dispute:

(a) Northern division wanted to go for production of a new type of special display boxes.

(b) The new design of the display boxes is prepared with the help of Thomson division.

(c) Now, Northern division wants to go for mass production of these new types of boxes & asks for bids from three companies, Thomson was one of the company & other two were outside companies-Westport & Eire.

(d) Bids received for per 1000 boxes:

(i) Thomson division: $ 480, (ii) Westport: $ 430, (iii) Eire: $ 432

Additional facts:

(a) Thomson division: Total cost is $ 400, which includes material cost of $ 280 & Profit of $ 80.

(b) Thomson division purchases Liner board from Southern division at $400 & the Total Cost of producing for Southern division is $240 with a profit of $ 160.

Questions to be answered:

(1) Which bid should Northern division accept that is in the best interests of Birch Paper Company?

Ans Northern division should accept the Thomson division but not at the same quoted price.

(2) Should Mr. Kenton accept this bid? Why or why not?

Ans Mr. Kenton (Manager of Northern division) should not accept the bids at the current price.

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

Ans Yes, the V.P has to intervene, since the coordination is between the divisions & the Corporate has...