Presentation on theme: "Transfer pricing: Birch paper Company"— Presentation transcript:
1 Transfer pricing: Birch paper Company Assignment #2 on-line
2 Birch Paper Company Company Context: a medium-sized, vertically integrated paper company, producing white and kraft papers and paperboardhas four producing divisions and a timberland division, which supplied part of the company’s pulp requirements“If I were to price these boxes any lower than $480 a gross,” said James Brunner, manager of Birch Paper Company’s Thompson Division, “I’d be countermanding my order of last month for our sales force to stop shaving their bids and to bid full cost quotations.tocks/private/snapshot.asp?privcapId=
3 Birch Paper Company Evaluation in Decentralized System: a policy of decentralizing responsibility for all decisions except those relating to overall company policyBirch’s division managers normally were free to buy from whichever supplier they wished, and even on sales within the company, divisions were expected to meet the going market price if they wanted the business.each division is judged on the basis of its profit and return on investmentit would be possible for top management to order the acceptance of another bid if the situation warranted such action.
4 Birch Paper CompanyNorthern Division designed a special retail display box for one of its finished papers in conjunction with the Thompson Division, which was equipped to make the box.Transfer Price Decision:Bids:1) Thompson (internal) - $ (20% rate)buys from Southern division (70% of $400 cost)Southern costs are 60% of transfer/selling price2) West Paper Co. (external) - $430.003) Erie Papers Inc. (external) - $432.00Plus purchases i) $90 per box from Southernand ii) $30 from Thompson (25% is variable)
5 Birch Paper Company Issues: Transfer Pricing Evaluation System Excess capacityEvaluation SystemResponsibility CentreDecentralized organization
6 Birch Paper CompanyWhat are the additional costs to Birch Paper Company if Northern buys the boxes from West or Erie, rather than from Thompson?
8 Birch Paper CompanyDoes the present system motivate Mr. Brunner in such a way that actions he takes in the best interests of the Thompson Division are also in the best interests of the Birch Paper Company? Explain.
9 Birch Paper CompanyTransfer price should allow for goal congruence – profit (internal) for divisions and profit (external) for company overallIn the absence of specific orders from top management, Kenton would accept the lowest bid, namely, that of West Paper for $430
10 Birch Paper CompanyWhat should the marketing vice president do?
11 Birch Paper Companyit is possible for top management to order the acceptance of another bid if the situation warranted such actionthe volume represented by the transactions in question was less than 5 percent of the volume of any of the divisions involved
12 Midterm Results Average: 55.46/75 or 74% Hi: 72/75 or 96% Lo: 15/75 or 20%Normal Distribution of gradesComments:Relate comments to scenarioExpand discussion even with limited time and spacingAvoid “dumping”