5-2: Birch Paper Company

In class we considered the analysis at the bottom of this sheet which shows it is in the
best short-term economic interests of Birch Paper to produce the display boxes internally.
However, we also know that it is in the best short-term economic interests of the
Northern ivision to accept the bid of !est Paper "ompany #i.e., this will $ive Northern
ivision its maximum profit%. Assume that the transfer price policy of Birch Paper is
(and has been) to transfer at market price #ad&usted for any internal savin$s%. 'nswer
the followin$ (uestions)
*. iscuss why has this situation arisen at Birch+ Is it a problem with the control
system and,or transfer pricing policy, is it a problem with one or more
mana$ers, or is there some other cause+
-. How, if at all, should the situation be dealt with in the short-run+ .hould the vice-
president $et involved+ iscuss.
/. iscuss whether the control system and,or transfer pricing policy of Birch Paper
need#s% to be chan$ed. If so, what specific chan$es would you recommend+ If
neither needs to be chan$ed, discuss why not.