Case Analysis Project: Birch Paper Company

Topics: Costs, Variable cost, Marginal cost Pages: 3 (954 words) Published: January 30, 2013
Group Case Analysis Project:
“Birch Paper Company”

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Question1
Mr. Kenton should accept Bid #2 – West Paper Company at \$430 as it was the lowest bid and thus will give Northern Division the highest return. Under the current company policy each division is judged independently based on profit and return, thus Mr. Kenton would only be interested in his own division’s success and not the overall success of the company. -------------------------------------------------

Question 2
In order to decide which bid is in the best interest of Birch Paper Company we need to examine each bid separately: Bid #1: Thompson Division - \$480
* Thompson Division’s cost = \$400
* Purchasing liner and corrugating medium from Southern Division: \$400*70% = \$280 * Therefore, other costs would be: \$400-\$280 = \$120
* Southern Division’s cost = \$280*60% = \$168
* Total cost to the Birch Paper Company: \$168+\$120 = \$288 Bid #2: West Paper Company - \$430
* Total cost to the Birch Paper Company: \$430
Bid #3: Eire Company - \$432
* Selling price of Thompson = \$30
* Thompson Division’s cost = \$25
* Thompson Division’s profit = \$30-\$25 = \$5
* Selling price of Southern Division = \$90
* Southern Division’s cost = \$90*60% = \$54
* Southern Division’s profit = \$90-\$54 = \$36
* Total cost to the Birch Paper Company = \$432-\$36-\$5 = \$391 Answer: Bid #1 – Thompson Division is in the best interest to the Birch Paper Company as it has the lowest total costs thus producing the highest overall revenues for the company. However, this answer does not reflect what would be in the best interest of the Northern Division as they would receive much lower profit margins from accepting the higher bid. Birch Paper Company is earning most of their profits in the Southern Division which has a 66.7% markup (\$280-\$168=\$122 or 66.7% markup) and the Thompson Division which has a 20% mark up (\$480-\$400=\$80 or 20%)...