Scribd Logo
Upload

Welcome to Scribd!

  • 877 views

    BIRCH Paper Company Solution

    Uploaded by

    hssh8
    The document analyzes a case involving the Birch Paper Company, which produces three paper product lines across multiple divisions. The Northern division received bids from the internal Thompson division and two external companies to produce boxes. While the Thompson bid was highest, it included profit from internal material transfers. The analysis finds that accepting the Thompson bid would not minimize total company costs. It suggests the company's transfer pricing system is dysfunctional as it incentivizes divisions to maximize their own profits rather than the total company profit. Changes are needed to better align division and company goals, such as evaluating divisions based on non-financial metrics or having divisions negotiate transfer prices.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    BIRCH Paper Company Solution

    Uploaded by

    hssh8
    877 views4 pages
    The document analyzes a case involving the Birch Paper Company, which produces three paper product lines across multiple divisions. The Northern division received bids from the internal Thompson division and two external companies to produce boxes. While the Thompson bid was highest, it included profit from internal material transfers. The analysis finds that accepting the Thompson bid would not minimize total company costs. It suggests the company's transfer pricing system is dysfunctional as it incentivizes divisions to maximize their own profits rather than the total company profit. Changes are needed to better align division and company goals, such as evaluating divisions based on non-financial metrics or having divisions negotiate transfer prices.

    Original Description:

    Birch Paper Company Management Control System Solution

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document analyzes a case involving the Birch Paper Company, which produces three paper product lines across multiple divisions. The Northern division received bids from the internal Thompson division and two external companies to produce boxes. While the Thompson bid was highest, it included profit from internal material transfers. The analysis finds that accepting the Thompson bid would not minimize total company costs. It suggests the company's transfer pricing system is dysfunctional as it incentivizes divisions to maximize their own profits rather than the total company profit. Changes are needed to better align division and company goals, such as evaluating divisions based on non-financial metrics or having divisions negotiate transfer prices.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    877 views4 pages

    BIRCH Paper Company Solution

    Uploaded by

    hssh8
    The document analyzes a case involving the Birch Paper Company, which produces three paper product lines across multiple divisions. The Northern division received bids from the internal Thompson division and two external companies to produce boxes. While the Thompson bid was highest, it included profit from internal material transfers. The analysis finds that accepting the Thompson bid would not minimize total company costs. It suggests the company's transfer pricing system is dysfunctional as it incentivizes divisions to maximize their own profits rather than the total company profit. Changes are needed to better align division and company goals, such as evaluating divisions based on non-financial metrics or having divisions negotiate transfer prices.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Management Control System

    Case Analysis on Birch Paper Company

    Written by:
    Giordan Berwyn Tanoto (17/408237/EK/21201)
    Hapsari Athaya Mulyanissa (17/415854/EK/21594)
    Nabila Azzah Shafy Arkabintaan (17/411412/EK/21383)
    Nadhira Azzah Shafy Arkabintaan (17/411413/EK/21384)
    Elrica Meliany Wibowo (17/408234/EK/21198)

    INTERNATIONAL UNDERGRADUATE PROGRAM


    FACULTY OF ECONOMICS AND BUSINESS
    UNIVERSITAS GADJAH MADA
    2019

    Problem Identification
    Birch Paper Company is a medium-sized, partly integrated company that produces three
    product lines; white papers, kraft paper, and paperboard. 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, apart from Thompson's bid it also
    get offers from two outside companies. In this case, there is a company policy where each division
    manager had full freedom and discretion to buy from anywhere. Thompson’s gets the most
    materials from within the company, but sales is mostly to outsiders. Thompson division felt that
    they have not received profit for their development work, hence entitled to mark up on production
    of box. Thompson bids for $480, whereas West bids for $432. Now, Northern division must accept
    which bid is the best interest of the company

    Case Analysis

    1. Which bid should Northern division accept to minimize the cost and maximize the
    profit in the best interest of Birch Paper Company ?

    Quotes per 1000 boxes:


    Thompson - $480/-
    West Paper - $432/-
    Eire Papers - $430/-
    So prima facie Eire’s quote is the lowest

    West Paper Company $430


    Erie Paper Company $432
    Contribution of profit from Southern
    $90 x 40% = $36
    Contribution Of Profit from Thompson
    $30 - $25 = $5

    Details of Thompson’s Quote:


    Thompson’s Out of Pocket Exp. : $400.00
    (Less) Supply from Southern Div, @70%: $280.00
    Hence, Cost of Thompson: $120.00
    Add: 20% OH + Profit: $80.00
    Total Quote $480.00

    Thompson Division $480


    Contribution of profit from Southern
    $400 x 40% x 70% = $112
    Contribution Of Profit from Thompson
    $480 - $400 = $80
    Total Cost = $288

    Thus, Thompson division should accept bids on the boxes of Thompson Division since it will
    minimize the cost of birch paper company.
    2. Should Mr. Kenton accept this bid? Why or Why not?
    Mr. Kenton should not accept the bid since their quote is higher than the other
    competitive market price. We need to assume that the transfer price remains $480, and
    their divisions have the full authority to chose their suppliers either from inside or outside
    based on the market price. Since the decentralization policy is applied in this company
    and each divisions profits are calculated and judged individually, then Northern div. Will
    not increase its purchase cost due to the hidden inefficiencies of Thomson& Southern div.

    3. Should the vice president of Birch Paper Company take any action?
    It is necessary for the vice president of Birch Paper Company to take action to improve
    and establish the procedures and policies for the determination of transfer pricing for
    each division so that it is profitable for the company. If needed, top management can be
    involved in making decision on which offer should be taken by the division and the
    determination of transfer price for each division. This should be done in order to maintain
    the company’s profitability as a whole and increase goal congruence between divisions so
    there is no division that only wants to maximize its own without regard to the overall
    profitability of the company. However, if the vice president does not intervene, then in
    this case Northern division will go ahead and buy from Erie Papers. This will cause more
    inefficiencies for Thomson.

    4. In the controversy described, how, if at all, is the transfer price system


    dysfunctional? Does this problem call for some change, or changes, in the transfer
    pricing policy of the overall firm? If so, what specific changes do you suggest?
    Ideally, the division should use the market price. However, Thompson used a cost-based
    transfer price instead market price. While the cost-based transfer price should only be
    used when company not just individual profit, each division. The transfer price system is
    dysfunctional because it focuses too much on individual sectors making profit and return
    on investment. Division’s focus should be shifted from individual department
    profitability to Group profitability. The focus must be on overall or total profit and ROI
    for the company as a whole, not only divisional. Each division has only a short-term
    orientation that leads to the decision on maximizing current profit and ROI.
    The matter in the Birch transfer pricing is the system that allows each division to set their
    own price which is aligned with the company's policy to decentralize responsibility and
    authority. Decentralization will trigger conflicts and disagreements in daily basis since
    every division only think about their own division benefit rather than a company as a
    whole. By having a centralized policy, it will help the company to increase and encourage
    every division to work together and be able to increase the total profit.

    Conclusion
    Birch company must evaluate their policy in transfer pricing system in order to increase
    company profitability as a whole. Their transfer pricing needs to be evaluated because
    decentralization makes each division is judged based on profits and ROI that cause an over-
    emphasize on profits of each division and encourage each division only pursue short term profits
    so they look better in company’s eyes. The company should assess them based on other non-
    financial things like quality so as to divert the division's emphasis on profits. In addition, the
    company should allow the divisions concerned to negotiate between themselves as they are the
    ones closest to the situation, rather than just asking the divisions to meet the market price. In
    addition, based on calculation Thompson division should accept bids on the boxes of Thompson
    Division since it will minimize the cost of birch paper company because total cost is low
    compared to other offers which is $ 288, if Birch paper produced by themselves. Each division
    needs to pay attention to the cost without including the profit element from results of inter-
    division transfers. Thus, the division goals will inline with company goals which increase the
    overall profit as a whole, not divisional.

    You might also like