Today's organizational thinking is oriented towards decentralization. One of the principal challenges in operating a decentralized system is to devise a satisfactory method of accounting for the transfer of goods and services from one profit center to another in companies that have a significant number of these transactions. The objectives of this case is whether the Northern Division of Birch Paper Company should buy corrugated boxes for a new product internally from the Thompson Division at a transfer price higher than the market price, or from one of their external suppliers. Also, should the vice president of Birch Paper Company take any action on the bidding price or final purchase decision for one internal division to another internal division?
Birch Paper Company is a medium sized, partly integrated paper company which contained four production divisions, including Thompson division, and a timberland division. Each division is encouraged to base its transfer price on the current market price and is judged independently on the basis of its profit and return on investments. After reviewing the Birch paper company case we feel that from the company perspective is to accept the Thompson bid. The Thompson bid is in the best interest of the company in terms of cash flows and long-term profit.
The problem facing this company is whether its decentralized divisions should buy from one another and help the company as a whole, or buy from an outside third party and possibly increase the profits of one division while neglecting the other divisions of the company. The Northern Division, while seeking a company to manufacture new boxes it needs, has obtained bids from three companies: the West Paper Company; the Thompson Division of Northern's parent company, Birch; and the Eire Papers company. Below the total outlay costs of accepting each bid has been summarized: Buy from West
Northern Division ---...
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