Birch

1) How would you resolve the transfer pricing conflict? Present calculations to support your arguments.

Costs to Birch Paper Company on the proposed bids.

BIRCH PAPER COMPANY

Per 1,000 boxes

WEST PAPER CO: Out of pocket Cost to Birch $430

EIRE PAPER, LTD: $432

Less: Southern profit ($90*40%) $36

Thompson profit ($30-$25) 5 $41

Out of pocket cost to Birch $391

THOMPSON $480

Less: Southern profit ($280*40%) $112

Thompson profit ($480-$400) 80 $192

Out of pocket cost to Birch $288

The best bid for Birch Paper Company would be with Thompson, one of its own divisions, since it represents the lowest out of pocket cost to BPC. Since Birch Paper Company’s responsibility structure is an investment center, in order to maximize divisional profits Northern would chose the $430 bid from West since it represents the lowest cost, thereby resulting in higher profits. Due to the possible reoccurrence of these problems it is to the company’s benefit that the vice president should get involved, present the case to award the bid to Thompson, thereby setting precedence for all division to follow, avoiding future problems.

2) In what ways, if any, would you change Birch paper's transfer pricing rules?

This ability for individual price setting deters the divisions from making purchases internally, although in the long run the company benefits from choosing, either internally or externally, the option with the lowest cost to the firm. If Thompson was persuaded to alter their sales cost from $480 to $430 this would make them one of the lowest bidders and inturn Northern would be willing to accept their offer. This pricing change would allow Northern to go internally without the vice president’s involvement.

Shown below are a break-down of the out of pocket cost to Birch and the reduction of the contribution margin to Thompson.

THOMPSON $430

Less: Southern profit ($280*40%) $112...