Birch Paper Company was a medium-sized, partly integrated paper company. It had four producing divisions, namely Northern Division, Thompson Division, Southern Division & one unnamed Division and a Timberland Division. Birch Paper was producing white and kraft papers and paperboard. A portion of its paperboard output was converted into corrugated boxes by the Thompson Division, which was also printed and colored the outside surface of the boxes.
The management implemented a policy of decentralizing responsibility and authority for all divisions except those relating to overall company policy. Each division was judged independently on the basis of its profit and return on investment.
Thompson division had provided services including package design and development on a special display box to Northern Division. Under the agreement, Thompson Division was reimbursed by the Northern Division for the cost of its design and development work, Thompson Division did not receive any profit on this project. Once all the specifications are ready, the Northern Division asked for bids on the box from the Thompson Division and from two outside companies.
Northern Division received the 3 bids as follows:
Bid No 1 – West Paper Company
The Northern Division received bid on the boxes of $430 a thousand from West Paper Company. Bid No 2 - Thompson Division
The bid offered from Thompson Division was S$480 a thousand of boxes. If Thompson Division got the order, it would buy its linerboard and corrugating medium from the Southern Division of Birch. About 70% of Thompson’s out of pocket cost of S$400 for the order represented the cost of linerboard and corrugating medium. Although Southern Division was running below capacity and had excess inventory, it quoted the market price, and it’s out of pocket cost on both liner and corrugating medium were about 60% of the selling price. Mr. Brunner, the...