CMA 302 – Tutorial Case Study: Final Draft
Birch Paper Company
Birch Paper Company is a medium sized partly integrated company that produces Kraft papers and paperboard. There are four producing divisions and one timberland division which supplies part of the company’s pulp requirements. The divisions are
- Northern Division
- Southern Division
- Thompson Division
- Division 4
Each division is operating independently with its own division manager. Also, each division’s performance had been judged on its profit and return on investment (ROI). The company policy of decentralizing responsibility and authority for all decisions except those relating to overall company policy, has been operated with the divisions.
Company policy states that each division manager is free to buy from whatever supplier he/she wished and also it could be on sales within the company.
Improvement has attributed upon the concept of decentralization that has applied to the company. (as the company’s profits and competitive position has been improved)
- The Northern Division had designed a special display box for one of its papers in conjunction with the Thompson Division, which was equipped to make the box.
- Thompson Division was reimbursed for the cost of its design and development work
– Thompson Division usually sourced its supply’s in house from the Southern division. In this case material cost $280 of the total cost of $400 per thousand boxes.
3 – Southern division sold its materials at market price of $280 with a cost of about $168 leaving it with a profit of $112 or 40%.
4 – Northern division received 3 Quotes to make the box’s, - Thompson division : $480,
- West Paper Company : $430
- Eire Paper Company : $432
5 – Eire paper would purchase outside liner from southern division for $90 per 1000 & it would be printed by Thompson division for $30 per thousand with a profit of $5 or 16%.
6 – Southern Division was running below capacity and had excess inventory but still charged 40% profit.
7 – Thompson Division at times was also running at below capacity but also charged 20% profit.
There appears to be an issue on transfer pricing.
1 - Transfer Pricing. There is an issue on transfer pricing.
- Issue - Transfer pricing.
- Why is transfer pricing an issue? Because Thompson division Manager does not want to meet the market price. - Why does the Thompson division not want to pay market price? Because the division manager wants to protect the divisions profits - Why does the Thompson division want to protect its profits? Because of company policy on Performance Evaluation, that each manager is responsible for their divisions profits. - Who owns the problem of company policy on performance evaluation. Top management own the problem as they are responsible for company policy.
– Company Policy on Performance Evaluation. Each division has been judged independently on its profit and ROI. The companies great emphasis on judging each division on profit has lead to each division trying to maximise its profits margins even at the expense of other other divisions.
This policy is also effecting goal congruence, as managers goals for increasing profits for their division at the expense of other divisions it is not helping the overall goal of the company.
The facts show that top management own the problem. This is because its not Thompson Divisions problem as they are free to quote whatever they like. It is also not Northern Divisions problem as they are free to accept the best quote that suits them.
It should be noted that this problem may only be a short term problem and in the long term market prices force should even things out.
Which bid should Northern...