Birch Paper Company

Topics: Accept, Out-of-pocket expenses, Costs Pages: 4 (807 words) Published: March 24, 2015
Birch Paper Company
Information given (All costs are for quantity of 1000)
1. If Northern accepts the bid from Thompson
Thompson companies Out of Pocket costs for 1000 boxes = $400 70% of Thompson Out of Pocket costs = Selling price of Southern division (line and corrugating medium) Hence, selling price of Southern = 70% * 400 = $280

Hence, Out of Pocket costs for Southern = 60% 280 = $168
2. If Northern accepts the bid from West
No out of pocket costs Thompson and Southern
3. If Northern accepts the bid from Thompson
Thompson companies Out of Pocket costs for 1000 boxes = $25 (printing the liners) 60% of the selling price ($90) of Southern is Southern’s Out of pocket expenses = $54 Below table summarizes the 3 scenarios

Accepting Thompson’s bid: Although total aggregated out of pocket costs of individual divisions’ amounts to $1048, but as a whole company, the out of pocket expenses (funds that is paid to outside vendors) for Birch is only $288( $120(Thompson) + $168 (Southern)) and the rest of the $780 is circulated within the company. (Exhibit A) Accepting Eire: Out of pocket expenses will be $511, but it will be compensated with the cash inflow of $120 ($30 + $90). Hence, the final out of pocket cost for Birch = $391. Accepting West’s bid, Northern’s out of pocket costs will be the lowest $430, but it will be highest out of pocket cost for Birch. Each alternative will effect each division in a different manner. Since Birch has encouraged decentralization, accepting the bid from West is the best option for Northern, since it is the lowest out of pocket cost for Northern. At the same time, this option will not bring any income to Thompson or Southern divisions. Thompson has already spent lot of his R&D resources in order to come up with a unique box design for Northern, and hence it will be a loss to Thompson and also for Birch. Moreover, based on the paper, both Thompson and Southern seem to be running below their capacity and with excess...
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