Management Control System

Topic : Case Study Birch Paper

Company
MBA SEM-4 (2019-’20)
-Presented by
Joshi Ganesh (1817) -Submitted To:
Shabas Shaikh (1849)
Sheth Jinal (51) Prof. Chetna mam
 Background
• Medium sized, partly integrated company

• Three product; white and Kraft papers and

paperboard
Birch

Northern Southern Thompson Division 4 Division 4

Working and Assessment
• Judgment based on the basis of its profit
and return on investment (ROI)
• Concept of decentralization-both
authority and responsibility
• Improvement attributed to above factor
 Situation
 Northern and Thompson division together
designed box for Northern division

 Thompson division was reimbursed by Northern

division for it’s designing and development

 After finalization, apart from Thompson’s bid it

also get offers from two outside companies

 Company policy where each division manager had

full freedom and discretion to buy from anywhere
 Cont…
• Thompson’s most materials from within
company but sales mostly outsiders
• If Thompson gets bid materials to be procured
from Southern division
• 70% of out of pocket costs of $400 were above
materials
• This constituted 60% of selling price
 The Northern division
received bids on 1000 boxes
1. From Thompson division - $480

2. From West Paper Company - $430

3. From Eire Paper Company - $432

Eire paper Company and
dilemma
 It would buy outside linear board from Birch
with special printing (to be done by
Thompson) $90 (a thousand boxes) and $30 for
printing.
 “Competitive market where higher costs
cannot be passed on, how can we buy own
supplies @10% higher than market rate.
 Other
Factors
 Thompson division felt not received profit for
their development work, hence entitled to mark
up on production of box
 “Cost variable for one division could be largely
fixed for company as a whole”
 Without orders from top management Kenton
would accept the lowest bid
 Transaction involved only 5% of volume of divisions
involved
Which bid should Northern division
accept that is in best interest of the
company?

 Thompson division

 In the calculation out the cost that Thompson

actually has the lowest costs associated with
them
 Cost involved
 Costs for Thompson are; Linear board and corrugating
medium: Cost $400x70%x60%=$168 plus out of pocket:
$400x30%=$120, for a total cost $288
 Cost for West Paper would be a total $430

 Cost for Eire Papers would be $90x60%=$54 (Southern)

plus $25 (Thompson), and their supplies of $432-5-
36=$391, total cost $470
 Should Mr.
Kenton accept
this bid?
• Mr. Kenton should not accept the bid from West
Paper because it is not in the best interest of the
company, but at the same time with the transfer
policy that exists, it is really up to him what is
in the best interest of his division. Mr. Kenton
should accept the bid from Thompson because
not only will result in the lowest cost but also it
will encourage buying from within the company
 Vice president action
 Yes the vice president should take any action.
As if no orders come from top management
Kenton would accept the lowest bid
 The vice president of the Birch should take action
in order to remedy the overall problems
associated with this transfer pricing policy
Is transfer pricing system
dysfunctional?
 Yes

 The transfer price system is dysfunctional

because it focuses too much on individual
sectors making profit and return on
investment

 Some alternative should be present which

strikes a balance between both