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University of d

Faculty of Management
Business Management 3rd year

Authors:
Piotr Bartenbach
Bartomiej Staszczyk
Dominik Wolski

Performance Measurement

Birch Paper Company - Case Study


1. Which bid should Northern Division accept that is in the best interests of
Birch Paper Company?
Cost calculation:
Bid value:
$480 / 1000 boxes
Southern Division profit:
$280 x 40% = $112
Cost of Thompson Division
Thompson Division Profit:
$480 $400 = $80
Total cost:
$480 - $112 - $80 = $288 / 1000 boxes
Cost of West Paper

Total cost:
$430 / 1000 boxes
Bid value:
$432 / 1000 boxes
Southern Division profit:
$90 x 40% = $36

Cost of Eire Papers Ltd.


Thompson Division profit:
$30 - $25 = $5
Total cost:
$432 - $36 - $5 = $391 / 1000 boxes

After tracking down payments of all three offers, Northern Division


should accept the one from the Thompson Division. This offer bears not
only the lowest cost for the Northern Division, but also encourages
transactions within the Birch Paper Company.

2. Should Mr. Kenton accept this bid? Why or why not?


Mr. Kenton should accept the bid from the West Paper because Birch
Paper is considered as the investment center. The offer from West Paper of
$430 bears the lowest cost so it is the best solution for the company as it

equals to higher profits. Also buying from an outside source gives


company opportunity to save resources.

3. Should the vice president of Birch Paper Company take any action?
It depends. If Kenton did not received any instructions from the top
management, he would be in position to simply accept the highest bid on
the offer. The problem is, that when Vice-President would decide to come
into the bidding process, his action could be perceived by the division
managers as a sign distrust towards them. Solution that has to be
introduced should not take into account only selected area of company but
whole bidding policy and system. Furthermore, there should be stated
clear situations and proper solutions to them as a set of standards to
follow in future events.

4. In the controversy described, how, if at all, is the transfer price system


dysfunctional? Does this problem call for some change, or changes, in the
transfer pricing policy of the overall firm? If so, what specific changes do you
suggest?

After having analyzed the transfer price system in the Birch Paper
Company we can say that it is dysfunctional. It is not totally wrong but in
fact the aim is not properly defined. If we take a look at their system we
can find out that they are much more focused on profitability and returns
on investments of individual sectors. Of course, it can be said that if
individual sectors are making a profit the whole company is profitable.
However, not in every case it works that way. One company should have
one common goal and that is what we can advise Birch Paper to do. They
need to start looking at the overall performance of the company not just
the individual departments.

5. Lessons learned.
From this case we were able to learn that company should not focus
only on individual sectors making a profit but on overall performance of
the company. Every sector should be profitable but their goals have to be
common. In situation when different sectors have different objectives it
might happen that goals of one sector would be contradictory to some
other sector.