TRANSFER PRICING:

BIRCH PAPER
COMPANY
Assignment #2 on-line
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 companys pulp
requirements
If I were to price these boxes any lower than $480 a
gross, said James Brunner, manager of Birch Paper
Companys Thompson Division, Id be
countermanding my order of last month for our sales
force to stop shaving their bids and to bid full cost
quotations.
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Birch Paper Company
Evaluation in Decentralized System:
a policy of decentralizing responsibility for all
decisions except those relating to overall company
policy
Birchs 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.

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)

Birch Paper Company
Issues:
Transfer Pricing
Excess capacity
Evaluation System
Responsibility Centre
Decentralized organization
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?
Birch Paper Company

Thompson West Paper Erie Papers Inc.
Divisional perspective:
Cost 480.00 $ 430.00 $ 432.00 $
Company Overall perspective:
Cost (external) 430.00 $ 432.00 $
Thompson variable costs 120.00 $ 25.00 $
(30.00) $
Southern variable costs 168.00 $ 54.00 $
(90.00) $
Cost to Company 288.00 $ 430.00 $ 391.00 $
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.
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
Birch Paper Company
What should the marketing
vice president do?
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

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