1 How would you resolve the transfer pricing conflict? Present calculations to support your arguments.
The three bids (per thousand boxes) are as follows:
Thompson division: $480
West Paper Company: $430
Eire Papers: $432
West Paper Company is the cheapest of the three although it is an outsider (as is Eire Papers). The manager of the Northern Division, William Kenton, should be allowed to buy from outside if the quoted price from the inside source is 10% over the market price. However, let us look at the costs for the three companies/divisions:
Liner and Corrugating medium = $400*0.7 = $280.
Thompson division bought this from the Southern division (another inside division) whose out of pocket costs were 60% of their selling price. So, actual costs for the liner and corrugating medium = $280*0.6 = $168 Other out-of-pocket costs = $400*0.3 = $120
Total costs = $168 + $120 = $288.
West Paper Company
Total costs = $430
Cost of liner (Southern Division) = $90*0.6 = $54
Cost of printing (Thompson Division) = $25
Rest of the costs = $432 - $90 - $30 = $312
Total costs = $54 + $25 + $312 = $391
Cost for Thompson Division is the lowest. So, Northern Division should accept the bid from Thompson. This is better for the company as a whole because it can maximize its profit and it is the lowest in cost.
2 In what ways, if any, would you change Birch paper's transfer pricing rules?
The current rules are not ideal for the company as a whole. If Northern division were to buy without intervention from the VP, they would have accepted the bid from West Paper Company since that would result in the lowest cost for the division. However, this would not result in profit maximization for Birch Paper Company.
The problem with the transfer pricing is that it allows each division to set its own price. The company policy decentralizes most of the power to the divisions. This could...