Case: Birch Paper Company Essay

As sh give birth in the calculations above, Federal should arrogate the bid from Thompson instalment as it has the terminal cost if all ravish outlays within the partnership were calculated at be. Incurring the lowest costs would also enable welt Paper Company to earn the highest net income possible.2. As alternatives for sourcing exists, Mr. Kenton should be permitted to choose the alternative that is in Northern variablenesss own interests. The transitee bell policy gives him the right to hired hand with either insiders or outsiders at his discretion. If he is unable to get a satisfactory equipment casualty from the inside source which is Thompson form, he is free to barter for from outside.Mr. Kenton, manager of the Northern division should non accept the bid from Thompson division. The triplet bids from Thompson division, West Paper Company and Eire Paper Company be $480, $430 and $432 respectively. pass judgment the bid from Thompson division would be accep ting the highest bid amongst all trio offers (highest costs). This would result in the lowest boodle. As the Northern division is evaluated as an investment union, it is judged independently on the basis of its cabbage and return on investment. Mr. Kenton should non accept the bid from Thompson division.3. The method of using transfer price to decide whether to in source is optimum if the selling profit centre throne sell all of its products to either insiders or outsiders and if buying center can obtain all of its requirements from either outside or insiders. The mart price then represents the opportwholey costs to the seller of selling the product inside. In this case, Thompson division had been running below capacity and Southern division also had excess inventory. The transfer price of $480 offered by Thompson division does not represent the opportunity costs of selling inside as on that point is no pack food market for the product outside. Also, the transfer price o f $480 is higher(prenominal) than the market price which is around $430. Deciding ground on transfer price pass on not induce goal congruence as the situation is not ideal.Without any intervention from the transgression hot seat of birch Paper Company, the Northern division would most probably accept the lowest bid from West Paper Company. This might result in the highest profits for Northern division but it is not in the best interests of Birch Paper Company. Accepting the bid from Thompson division would boost involve for the twain another(prenominal) divisions. The losses cut would most probably be more than the costs saved by Northern division which is $50 ($480-$430).The vice president should give specific orders to Northern division to accept the bid from Thompson division. However, as the transaction in this case represents less than 5% of the brashness of any of the divisions involved, it might not be possible for the vice president to intervene other transactions when similar problems arise.4. Ideally, when there is an availability of market price, the division should use it. However, Thompson used a cost-based transfer price instead. Cost-based transfer price should only be used when the market price is not available. The problem with Birchs transfer pricing system is that they get from each one division to set their own price freely which is inline with the alliances policy to decentralize responsibility and authority. When each division can set their own price, conflicts and disagreements can occur on a grass basis and each division could make decisions that only benefit their own division instead than the company as a whole.Firstly, we look at the transfer price that Thompson quoted. It is about $50 more than the market price. This shows that their price is not competitive enough. Thompson is operating below capacity and yet it quoted a price which is higher than the market price. The reason devoted was that anything less than $480 , they will not be able to earn a profit and also, given that they did not get any profit from developing the product for Northern, Brunner feels that they are entitled to a good markup. This is inconsistent with the expectation that the division must meet the market price if they wanted the business. Market price should be used as it reflects how well is the division doing as compared to competitors.The amount of upstream placed costs and profits that are included in the terminal price that was sold to the outside customer could be substantial if Thompsons bid was accepted. And Northern might not be willing to take down its own profit to optimize company profit. Hence, Thompson, if unwilling to follow the market price blindly, could use the two-step pricing to calculate their transfer price. That is, transferring the goods to Northern on standard variable cost on a per unit basis and fixed cost and profit on a thug sum basis.In this way, Thompson will not be transferring major ity of their fixed cost to Northern because they are operating on excess capacity. unless of course, this method must be discussed with Northern.It was mentioned that Southern quoted the market price to Thompson yet though they are operating on excess capacity. This will not pose a problem as the market price reflects the demand and supply situation of the market and is ad only ifed automatically by the demand and supply. Also, account must be taken into of the fact that Thompson will not be able to get a better price from other outside sources as most will follow the market price too.The underlying problem of the transfer price system could be that each division is judged based on profits and return on investment. This causes the division to over-emphasize on profits and encourages goal incongruence. Each division aims at achieving short profits so as to look better in the companys eyes. In their bid to achieve a high profit figure, they fail to optimize the companys profit as a whole. This will affect the company long-term profits.Hence, the company should not just assess each division based solely on financial figures like profit and return on investment. The company should assess them based on other non-financial things like quality so as to turn the divisions emphasis on profits. In addition, the company should kick the divisions concerned to negotiate between themselves as they are the ones closest to the situation, rather than just asking the divisions to meet the market price.