Dharma Putranto Dendy Fikosasono Jemy Yapola Robby S Irawan Yuli Rosiana.

Dharma PutrantoDendy Fikosasono

Jemy YapolaRobby S Irawan

Yuli Rosiana

NORTHERN DIVISION

BIRCH PAPER COMPANY

X DIVISIONTHOMPSON DIVISION

SOUTHERN DIVISION

Was a medium-sized company which partly an integrated paper company

Producing white and craft papers and paperboard and converted into corrugated boxes

The corrugated boxes produce by the Thompson Division which also printed and colored the outside surface of the boxes

Had 4 (four) producing divisions

- Northern Division: designed a special display box

- Thompson Division: package design, perfecting the design, production methods

- Southern Division: produce linerboard and corrugating medium and sometimes sell to Thompson division

For several years, each division had been judged independently on the basis of its profit and return on investment

The company’s top management believed that the company’s profits and competitive position definitely had improved

Most of Thompson’s sales were made to outside customers

The Northern division received bids on the boxes of $480 from Thompson division, $430 from West Paper Company and $432 from Eire Papers, Ltd. Which bid should Northern division accept to minimize the cost and maximize the profit in the best interest of Birch Paper Company ? West Paper Company $ 430Eire Paper Company $ 432

Contribution of profit from Southern $ 90 x 40% = $ 36

Contribution of profit from Thompson $ 30 - $25 = $ 5

Total Cost $ 391

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

So Northern Division should accept bids on the boxes of Thompson Division, because it minimizes cost of the Birch Paper Company

Should Mr. Kenton accept this bid ? Why or Why not ?

Mr. William Kenton as a manager of Northern Division should not to accept the bid, because:

1.Birch Paper Company gave a decentralizing responsibility and authority for each division based on profit and return on investment. Mr. Kenton should not accept the bid from Thompson Division and chose either Eire’s or West Paper bids which offered lower price cost on the interest of Northern Division

2.Since Eire bought the materials from Southern Division which means that Eire gives a contribution to Birch Paper Company as a whole. Southern Division could be more optimalizing its capacity and reduced its excess inventory by taking the order from Eire Paper company.

Should the vice president of Birch Paper Company take any action ?

The vice president of Birch Paper should take some action in order to decide the best decision for the company’s benefit overall.

If the vice president did not take any action, Northern division would most likely to choose Eire Paper to provide the order and it would cause a more inefficiency in Thompson division

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 ?

The transfer pricing become dysfunctional because did not accommodate the issue with the market price.

The profit-center transfer pricing should be adjusted based on the cost-based transfer pricing.

Detail of the calculation:

THOMPSON DIVISION:Thompson’s selling price to Northern Division = $ 480 20% profit margin (profit margin: ($ 480 - $ 400)/ $ 400 = 20%)

 Thompson’s out-of-pocket costs = $ 400Southern’s selling price to Thompson (transfer pricing: 70% x $ 400) = $ 280

----------- - Other overhead costs (outsider suppliers) = $ 120

  SOUTHERN DIVISION :

Southern’s out-of-pocket costs = $ 168(60% x $ 280)Southern’s profit = $ 112 67% ($ 112/$ 168)($ 280 - $ 168 = $ 112)

- Southern division should reduce the percentage of its profit lower than 67 %

- Thompson division’s profit can’t be lower because the overhead costs and 67 % of margin should be adjusted to follow the market price in the end

Market Price approximately = $ 430

THOMPSON DIVISION:Thompson’s selling price to Northern Division = $ 430 20% profit margin

 Thompson’s out-of-pocket costs = $ 358.33(new out-of-pocket costs: $ 430 / 1.2 = $ 358.33)Other overhead costs (outsider suppliers) = $ 120

----------- - New Southern’s selling price to Thompson Division= $ 238.33

  SOUTHERN DIVISION :

Southern’s out-of-pocket costs = $ 168(60% x $ 280)New Southern’s profit = $ 70.33 42% ($ 70.33 / $ 168)($ 238.33 - $ 168 = $ 70.33)

- From the calculation, there is a reduction profit margin in Southern division from 67 % to 42 % so the price could meet with the market price

- Top-level management should develop an arbitration committee to provide the best solution based on profit sharing and profit mechanism for the company as a whole without affecting the decentralization that has been well established

- Profit sharing itself is dealing with the share of profit in each division so that each division could well operate.

- Profit mechanism more dealing with efficiency and effectiveness on each division such as excess inventory, production and operation capacity.

THANK YOU