Birch Paper

Birch Paper Company

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 from

West 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: Linear board and corrugating medium: Cost $400x70%*60%= $168 plus Out of Pocket: $400x30%=120, for a total cost of $288.

Costs for West 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 from

West 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.

He should accept the bid from Thompson because not only will it result in the lowest cost, but also it will encourage buying from within the company.

3.Should the Vice-President of Birch Paper Company take any action?

Yes. if no orders come from top management Kenton would accept the lowest bid. The vice president of Birch should take action in order to remedy the overall problems associated with this transfer pricing policy. The question of if the VP should take any action is a dilemma in this matter as there are Pros and Cons on each side. If the vice president gets involved in the bidding process it is like not enough space and doubting their capability of the division managers.

4.In the...