Case 6-2: Birch Paper Company
Which bid should Northern Division accept that is in the best interests of Birch Paper Company?
Northern Division should accept the bid of the Thompson division even though the bid from West Paper seems at first to be the best choice. In you calculate out the cost you find that Thompson actually has the lowest costs associated with them. Costs for Thompson are as follows: Linearboard and corrugating medium: Cost $400x70%= $168 plus Out of Pocket: $400x30%=120 for a total cost of $288.Costs for West Papers would be a total of $430, and 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.
Should Mr. Kenton accept this bid? Why or why not?
Mr. Kenton should not accept the bid from West because it isn’t in the best interest of the company, 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. I believe 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?
The vice president of Birch should take action, but not against just this division. I think he needs to take action in order to remedy the overall problems associated with this transfer pricing policy. If needed top management is able to order the acceptance of another bid.
In the controversy described, how, if at all, is the transfer price system dysfunctional? Does this problem call for some change, or changes, in the transfer pricing policy of the overall firm? If so, what specific changes do you suggest?
The transfer price system is dysfunctional because it focuses too much on individual sectors making profit and return on investment. It should focus on success and profit for the overall company not just individual profit. Each division...
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