Birch Paper Company
Relevant Information & Equations
Birch Paper Company is a producer of paper, paperboard, and corrugated boxes. The company is integrated, consisting of four separate production divisions. One of its divisions, Northern Division, asked for bids on a special corrugated box. It requested bids from one of its sister division (Thompson Division) and from two outside companies. The issue at hand is whether Northern should accept a bid from its sister division or from one of the outside companies. It should be noted that Thompsons bid is substantially higher than the bids received from the outside company. Relevant information pertaining to the three bids are provided below.
Bid $510 per 1000 boxes
Thompson is marking the product up by 24.5% for a profit of $100. -
$410 x 24.5% = $510 per 1000 boxes
Thompson’s out of pocket expenses per 1000 boxes amount to $410 -
75% or $307.50 of the $410 represents the cost of linerboard and corrugating medium which will be purchased from its sister division Southern. That leaves $102.50 remaining and designated to other out of pocket costs per 1000 boxes. -
$410 x 75% = $307.50; $410 - $307.50 = $102.50 out of pocket costs per 1000 boxes.
If Thompson gets the order from Northern it will buy its linerboard and corrugating medium from the Southern Division of Birch. -
Southern’s out of pocket costs for both liner and corrugating medium were about 65% of its selling price. That amounts to $199.88 total out of pocket costs for Southern. -
$307.50 x 65% = $199.88 out of pocket costs per 1000 boxes. -
This leaves a profit of $107.62 per 1000 boxes for Southern.
West Paper Company
Bid $465 per 1000 boxes with no purchases or deals involving any Birch divisions.
Bid $450 per 1000 boxes.
Eire papers would buy the outside linerboard from Birch. -
The outside linerboard would be supplied by the Southern...
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