What bid should Mr. Kenton accept?
Mr. Kenton should accept $430 as a bid when we he views this decision to only maximize the division’s profits. The basic premise here would be that any division should have the main target of reducing its costs. He can also consider the bid of $432 as it would increase the profits of the Birch Paper Company by a higher magnitude than the $ 2 extra price than they would be paying. The profit would be $ 5 + $ 36(40% of margin of $ 90) = $ 41. Thus he can also consider the price of $ 432 from Eire Papers because it would increase the Birch’s profits without affecting Northern Division results considerably.
Which bid is in the best interest of Birch Paper Company?
The best bid in the interest of Birch paper Company is $ 480 bid by Thompson Division, this would help in retaining the $ 112 (Southern Division profit) + $ 48 = $ 160-41( the profit that would otherwise had been made by Birch if it would accepted the $ 432 bid) = $ 121 in the Birch Company which otherwise would have been taken by some other company. Southern Division’s Profit
+ Thompson’s Profit
Less : Otherwise retained if $ 432 bid was accepted
= Total Amount Retained Back 112
Should the commercial VP intervene? If so, how?
Yes VP should intervene.
The policy can be put regarding the transfer pricing which would be based on the opportunity cost of the divisions. If the divisions is operating at full capacity then the opportunity cost would be the market price that the division is charging for its products and if the division is operating at less than the full capacity and order fulfilment can be achieved at less than the capacity than the opportunity cost should be the variable cost of producing the extra units. This would help is reducing the cascading effect of overpricing the inputs to each other and rather would be based on the opportunity cost involved.
Example: In a changed scenario Southern division was operating at full capacity and...
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