Case Study On Birch Paper Company With Regard To Transfer Pricing.

1087 words - 4 pages

AA312Case: Birch Paper Company1. Calculating all three options based on costsThompson DivisionCostsLinearboard and corrugating medium 168(70%*400)*60%30% of out of pocket costs 120(30%*400)Total 288West PapersCostsTotal 430Eire PapersCostsOutside linear(Southern div) 54(60%*90)Printing(Thompson div) 25Own Supplies 312(432-5-36)Total 391As shown in the calculations above, Northern should accept the bid from Thompson division as it has the lowest cost if all transfer prices within the company were calculated at costs. Incurring the lowest costs would also enable Birch Paper Company to earn the highest profits possible.2. As alternatives for sourcing exists, Mr. Kenton should be permitted to choose the alternative that is in Northern division's own interests. The transfer price policy gives him the right to deal with either insiders or outsiders at his discretion. If he is unable to get a satisfactory price from the inside source which is Thompson division, he is free to buy from outside.Mr. Kenton, manager of the Northern division should not accept the bid from Thompson division. The three bids from Thompson division, West Paper Company and Eire Paper Company are $480, $430 and $432 respectively. Accepting the bid from Thompson division would be accepting the highest bid amongst all three offers (highest costs). This would result in the lowest profits. As the Northern division is evaluated as an investment center, it is judged independently on the basis of its profit and return on investment. Mr. Kenton should not accept the bid from Thompson division.3. The method of using transfer price to decide whether to in source is optimum if the selling profit center can sell all of its products to either insiders or outsiders and if buying center can obtain all of its requirements from either outside or insiders. The market price then represents the opportunity costs to the seller of selling the product inside. In this case, Thompson division had been running below capacity and Southern division also had excess inventory. The transfer price of $480 offered by Thompson division does not represent the opportunity costs of selling inside as there is no demand market for the product outside. Also, the transfer price of $480 is higher than the market price which is around $430. Deciding based on transfer price will not induce goal congruence as the situation is not ideal.Without any intervention from the vice president of Birch Paper Company, the Northern division would most probably accept the lowest bid from West Paper Company. This might result in the highest profits for Northern division but it is not in the best interests of Birch Paper Company. Accepting the bid from Thompson division would boost demand for the two other divisions. The losses cut would most probably be more than the costs saved by Northern division which is $50 ($480-$430).The vice president should give specific orders to Northern division to accept the bid from Thompson division....

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