BACKGROUND   Medium sized. partly integrated company 3 products-white and Kraft papers and paperboard products- .

Working & Assessment Judgment based on profit and return on investment(ROI) Concept of decentralization-both authority and decentralizationresponsibility Improvement attributed to above factor .

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 .SITUATION Northern and Thompson divisions together designed box for Northern division Thompson division was reimbursed by northern division for it¶s designing and development. After finalization. .

If Thompson gets bid Materials to be procured from southern division.SITUATION Thompson¶s most materials from within company. but sales mostly to outsiders. 70% of out of pocket costs of $400 were of above materials This constituted 60% of selling price .

$432 Eire Paper Company .BIDS(per 1000) Thompson .$430* .$480 West Paper Company .

³Competitive market where higher costs cannot be passed on. how can we buy our own supplies @ 10% higher than market rate.*Eire paper company and dilemma It would buy outside linear board from birch with special printing(to be done by Thompson) @ a cost of $90(per thousand) and $30 for printing. Northern division) .´ -William Kenton (Manager.

Other factors Thompson division felt not received profit for their development work. Transactions involved only 5% of volume of divisions involved. ³Costs variable for one division could be largely fixed for company as a whole´ Without orders from top management Kenton would accept the lowest bid. hence entitled to mark up on production of box. .

West Paper seems at first to be the best choice. In you calculate out the cost you find that Thompson actually has the lowest costs associated with them. (intricacies involved) . even though the bid from division.Which bid should northern division accept that is in best interest of the company? Thompson division.

for a total cost of $288. $432-   .Costs involved  Costs for Thompson are a: Linearboard and corrugating medium: Cost $400x70%*60%= $168 plus Out of Pocket: $400x30%=120. Costs for West Papers would be a total of $430 costs for Eire Papers would be $90x60%= $54 (Southern) plus $25 (Thompson). and their supplies of $432-5-36= $312 for a total of $391.

Should Mr. but at the same time with the transfer policy that exists. it is really up to him what is in the best interests of his division. Kenton should not accept the bid from West because it isn¶t in the best interest of the company. I believe he should accept the bid from Thompson because not only will it result in the lowest cost. but also it will encourage buying from within the company. .kenton accept this bid? Mr.

. As if no orders come from top management Kenton would accept the lowest bid The vice president of Birch should take action in order to remedy the overall problems associated with this transfer pricing policy.Vice president any action? Yes.

. Some alternative should be present which strikes a balance between both.Is transfer pricing system dysfunctional? To an extent . The transfer price system is dysfunctional because it focuses too much on individual sectors making profit and return on investment.yes.


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