Transfer pricing: Birch paper Company

1. Transfer pricing: Birch paper Company Assignment #2 on-line

2. Birch Paper Company • Company Context: • a medium-sized, vertically integrated paper company, producing white and kraft papers and paperboard • has four producing divisions and a timberland division, which supplied part of the company’s pulp requirements • “If I were to price these boxes any lower than $480 a gross,” said James Brunner, manager of Birch Paper Company’s Thompson Division, “I’d be countermanding my order of last month for our sales force to stop shaving their bids and to bid full cost quotations. • http://investing.businessweek.com/businessweek/research/stocks/private/snapshot.asp?privcapId=9206565

3. Birch Paper Company • Evaluation in Decentralized System: • a policy of decentralizing responsibility for all decisions except those relating to overall company policy • Birch’s division managers normally were free to buy from whichever supplier they wished, and even on sales within the company, divisions were expected to meet the going market price if they wanted the business. • each division is judged on the basis of its profit and return on investment • it would be possible for top management to order the acceptance of another bid if the situation warranted such action.

4. Birch Paper Company • Northern Division designed a special retail display box for one of its finished papers in conjunction with the Thompson Division, which was equipped to make the box. • Transfer Price Decision: • Bids: • 1) Thompson (internal) - $480.00 (20% rate) • buys from Southern division (70% of $400 cost) • Southern costs are 60% of transfer/selling price • 2) West Paper Co. (external) - $430.00 • 3) Erie Papers Inc. (external) - $432.00 • Plus purchases i) $90 per box from Southern • and ii) $30 from Thompson (25% is variable)

5. Birch Paper Company • Issues: • Transfer Pricing • Excess capacity • Evaluation System • Responsibility Centre • Decentralized organization

6. Birch Paper Company • What are the additional costs to Birch Paper Company if Northern buys the boxes from West or Erie, rather than from Thompson?

7. Birch Paper Company

8. Birch Paper Company • Does the present system motivate Mr. Brunner in such a way that actions he takes in the best interests of the Thompson Division are also in the best interests of the Birch Paper Company? Explain.

9. Birch Paper Company • Transfer price should allow for goal congruence – profit (internal) for divisions and profit (external) for company overall • In the absence of specific orders from top management, Kenton would accept the lowest bid, namely, that of West Paper for $430

10. Birch Paper Company • What should the marketing vice president do?

11. Birch Paper Company • it is possible for top management to order the acceptance of another bid if the situation warranted such action • the volume represented by the transactions in question was less than 5 percent of the volume of any of the divisions involved

12. Midterm Results Average: 55.46/75 or 74% Hi: 72/75 or 96% Lo: 15/75 or 20% Normal Distribution of grades Comments: Relate comments to scenario Expand discussion even with limited time and spacing Avoid “dumping”