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 Division to accept the bid of West Paper Company (i.e., this will give Northern Division its maximum profit). Assume that the transfer price policy of Birch Paper is (and has been) to transfer at market price (adjusted for any internal savings). Answer the following questions: 1. Discuss 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 managers, or is there some other cause? 2. How, if at all, should the situation be dealt with in the short-run? Should the vicepresident get involved? Discuss. 3. Discuss whether the control system and/or transfer pricing policy of Birch Paper need(s) to be changed. If so, what specific changes would you recommend? If neither needs to be changed, discuss why not.