Birch Paper Company Case Solution

Topics: Economics, Vice President of the United States, Variable cost Pages: 7 (2505 words) Published: December 8, 2013
BIRCH PAPER COMPANY CASE ANALYSIS
Executive Summary
Birch Paper Company is a medium sized, partly-integrated paper company. It produces white and craft papers and paperboard. It has four producing divisions and a timberland division – The Thompson division converts the paperboard output into corrugated box and prints and colors the outside surface of the box. The Northern division produces the paper box, while the Southern division supplies the corrugating medium and inner and outer liners. Timberland division supplies part of the company’s pulp requirement. It has been the company policy of decentralization to allow the divisions to act independently in all the affairs of their divisions except for the broader company policy, each division is judged on the basis of its profit generation and return on investment figures. Each division is free to buy from any supplier he wished, and even for dealings within the company, divisions were expected to match the market price if they wanted the business. This policy according to the company’s top management has worked well and delivered the desired results. The Northern division had designed a special box in collaboration with the Southern division with Thompson’s staff perfecting the design and production methods over several months, the Thompson division was reimbursed for its effort according to the agreement between the two divisions. The Northern division has asked for bids for the development of the boxes from the Thompson and two outside companies, Thompson quoted a price of $480 a thousand, West Paper Company a price of $430 a thousand and Eire Papers Inc a price of $432 a thousand. If Thompson gets the order, it would buy linerboard and corrugating medium from the Southern division. If Eire Papers win the bid, they have agreed to buy outside liner from the Southern division and print their boxes from the Thompson division. The manager of the Thompson division is adamant on its bidding price, it includes the full 20 percent overhead and profit charge and its manager feel that his division is entitled to the profit having done the development work on the box and having received no profit. The commercial Vice President of the Birch is discussing the bidding details with the manager of the Northern division, accepting Thompson’s bid will raise the cost of the Northern division that is competing in a very competitive market. In absence of any order from the top management, the Northern division will accept the lowest bid of $430 from West Paper Company. The Thompson and Southern divisions are not operating at their full capacity, their under utilization is of concern to the Vice President. This transaction, although less than the 5 percent of the volume of any of the divisions involved, might affect the future transactions of the divisions.

Situation Analysis
In Birch Paper Company, each division is judged by the profit it generates and the return on investment to the capital invested in. This model has delivered results in line with the expectations from the top management. Except for the overall company policy each division is authorized to take all the decisions independently including the purchase and sales within the company divisions. In absence of any directive from the top management, the Northern division will accept the lowest bid of $430 from the West Paper Company for it will be the lowest and will be in the best interests of the Northern division, but not necessarily of the Birch company as a whole unit. Accepting this bid will mean no business for the Thompson and Southern divisions at all, which already are not in a good financial state. Calculation of cost with the Northern division and Company perspective

Thompson’s bidWest Paper’s bidEire Papers’ bid
Northern division perspective:
Cost$480$430$432
Overall company perspective:
Cost (external)0$430$350
Thompson variable costs$1200$(30-25)
Southern variable costs$1680...
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