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Prepared By:
Patel Sweta Patel Sharaddha Patel Payal Patel Nayana Rami Chirag

Birch Paper company was a medium sized, partly integrated company producing white and Kraft papers and paperboard. Portion of its paper board output was converted into corrugated boxes by Thompson division.

Divisions of Birch Paper Company





Division 4


Each division had been judged independently on the basis of its profit and ROI. Concept of decentralization is there for all type of decision.

Northern and Thompson divisions together designed box for Northern division. Thompson division was reimbursed by northern division for the cost of its design and development work. Northern division asked for bids on the box from the Thompson division and two outside companies. Company policy where each division manager had full freedom to buy from anywhere .

If Thompson got the order from Northern, it would buy its linerboard and corrugating medium from the Southern division. About 70% of Thompsons out-of-pocket cost of $400 for the order represented the cost of linerboard and corrugating medium. Southern divisions out-of-pocket cost on linerboard and corrugating medium were about 60% of selling price.

Bids received by Northern division

By Thompson division: $480

By West Paper Company : $430 By Eira Papers Ltd. : $432


Condition of Eira company:

They would buy from Birch the outside linerboard with special printing already on it , but would supply its own insight liner and corrugating medium. The outside liner would be supplied by southern division at a price equivalent of $90, and it would be printed for $30 by Thompson division.(Of $30, about $25 would be out-ofpocket cost.)

Q-1 Which bid should northern division accept that is in best interest of the company?

Thompson divisions bid should be accept by the Northern division. Because from the below calculation of the transfer pricing we can conclude that, the lowest bid is from the Thompson division.

Cost calculation
Thompson: Cost of Linerboard and Corrugating medium= 400*70%*60% = $168 Out-of-pocket cost = 400*30% = $120 $288 West Papers:


Eira Papers: Out-of-pocket Cost: outside linerboard from southern (90*60) = Thompson = Other: ( 90*40) = Out-of-pocket (30-25) = So. Cost of Eira Company= 432-79-41 =

$54 $25 $36 $5

$79 $41 $312

Costs of bids are,

Of Thompson division: $288 Of West Paper Company : $480

Of Eira Papers Ltd. : $312

Q-2 Should Mr.kenton accept this bid? Why or Why not?

Mr. Kenton should not accept the bid from West paper Com., seems it looks low cost bid at a first glance, but the cost of it is higher as compare to the Thompson division. We believe that he should accept the bid from Thompson division because not only will it result in the lowest cost, but also it will encourage buying from within the company.

Q-3 Should the Vice president of Birch Paper Company take any action?
Yes, Vice President should try to improve the capacity of Thompson Division because that is not running at its capacity. He should also try to clear the transfer pricing policy. There can be a probability that each departments calculate differently for the transfer pricing policy. So. There should be some standard for that.

Q-4 Is the transfer price system dysfunctional? Does this problem call for change? What changes suggest?

Yes, change is needed. Yes, The transfer price system is dysfunctional because it judged independently on the basis of profit and return on investment. And clear transfer pricing system is also not mentioned. So, that should be clear. Some alternative should be present which strikes a balance between all the divisions.