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Birch Paper Company Solution
Birch Paper Company Solution
Q . Which bid is in the best interests of Birch Paper Company? That is, which course of
action is more profitable for the company as a whole?
Ans: From the perspective of strategic control, it is the duty of the management to support its
own divisions especially in comparison with external companies. Moreover, it is important to
understand the boundaries of the organization. The market quotations have been sought from
market companies but these companies belong to a class of suppliers. If we use Porter's
model these forces represent a competitive force called supplier power. So from the
perspective of Birch Paper Company its own division should be selected over that of an
outside company. Remember if a product is purchased from a division, there is no external
cash flow. No cash flows out of the company. On the other hand if the product is purchased
from an external company there will be a cash outflow from the company. From a purely
arithmetical point of view if the product was purchased from outside the cost would be $430
and in addition per piece Thomson Division would gain $5 per piece and Southern Division
would gain an additional $36. That is a total of $41. If $41 were subtracted from $430 the net
price to Birch would be $389, whereas the cost incurred by Thomson would be $400.
However, the wider issue is that Thomson is trying to recover its overhead costs by quoting a
higher price. This is the gain that is legitimately due to Thomson and Birch would gain by
placing the order with Thompson Division.
Q 3. Should the commercial vice president intervene? Is so, how?
Ans . The commercial vice president should intervene and request Northern Division to
purchase the box from Thomson Division. The rationale is that the Thomson division is a
responsibility center has not quoted a higher figure because of inefficiencies in the production
process; however, it has tried to allocate the legitimate overhead costs to the product cost.
There is a pressure on Thomson Division to show operational profits and in accordance to the
company policy Thompson Division is allocating the legitimate costs to the product it has
helped develop. The Northern Division is also trying to protect its profits by outsourcing.
However, since the development costs have actually been incurred it would be iniquitous to
purchase the boxes from an outside supplier. The commercial vice-president should instruct
Northern Division to make purchases from Thompson Division. Northern is the beneficiary
of the development process and so it must bear the cost of development incurred by
Thomson. Behaviorally, Thompson Division has been displaced because it has incurred the
cost of development but has not been compensated for the development cost. What
Thompson is trying to do is to recover its legitimate overheads by increasing the markup on
the manufacture of the boxes. The commercial manager should take up the role of diffusion
the tension in the organization and if he instructs Northern Division, there will be no
difficulty faced by Northern in placing the order with Thompson division