Birch Paper Company Case Summary
Question #1. Which bid should Mr. Kenton accept?
Assuming Birch Paper’s current transfer pricing policy and rewarding system as given, Mr. Kenton should accept the West Paper Company bid for $430. By accepting this bid, the Northern Division will incur in the lowest cost possible and be able to generate a higher mark-up when selling the product. Because the division will be rewarded based on its own profit, this is the best decision.
The company currently has a competitive profile, in which the divisions are measured based on profit generated and are incentivized to do what is optimal to the own division, even though that might represent purchasing from an outside supplier.
However, this is not the best choice from the perspective of …show more content…
In order to help solve that conflict, Birch Paper should implement a dual pricing system for transfer prices, in which the buying division would receive the transferred good at cost and the selling division would sell the product at market price. Consequently, the selling unit would be willing to generate profits and the buying unit would be incentivized to purchase internally. At the same time, the divisions would book as revenues the market price of the transferred good, instead of the cost. The divisions would be rewarded based on the profit generated, which would include revenue at market prices discounted by both the out-of-pocket costs and any additional costs incurred (overhead, idle capacity). This option solves the conflict faced by Birch and allows the company to make optimal decision that maximizes profits.
Question #2. Which bid is in the best interests of Birch Paper?
In order to answer the question above I analyzed what is the actual costs incurred and profits generated in each bid. Below is a summary of each bid: …show more content…
Consequently, this is the bid that is in the best interest of Birch Paper, as the company will be able to generated higher profits.
Question #3. Should the commercial vice-president intervene? If so, why?
Under the current transfer pricing policy and rewarding system the commercial vice-president should intervene to make the Northern Division purchase the product from the Thompson
Division. As presented in question #2, the Thompson Division bid is the one that represents the lowest cost to be incurred by Birch Papers, and consequently is the one that maximizes the profit generated by the company. However, the vice-president should allow the Northern Division purchase the product from the Thompson Division at a price of $430, which is the market price, and not $480, in order to be fair and coherent with the rules in place. This decision would make the rules clearer and would avoid incentivizing any division to sell transfer goods for more than
market price, which is not the internal policy of the company. If the vice-president decides
Assuming Birch Paper’s current transfer pricing policy and rewarding system as given, Mr. Kenton should accept the West Paper Company bid for $430. By accepting this bid, the Northern Division will incur in the lowest cost possible and be able to generate a higher mark-up when selling the product. Because the division will be rewarded based on its own profit, this is the best decision.
The company currently has a competitive profile, in which the divisions are measured based on profit generated and are incentivized to do what is optimal to the own division, even though that might represent purchasing from an outside supplier.
However, this is not the best choice from the perspective of …show more content…
In order to help solve that conflict, Birch Paper should implement a dual pricing system for transfer prices, in which the buying division would receive the transferred good at cost and the selling division would sell the product at market price. Consequently, the selling unit would be willing to generate profits and the buying unit would be incentivized to purchase internally. At the same time, the divisions would book as revenues the market price of the transferred good, instead of the cost. The divisions would be rewarded based on the profit generated, which would include revenue at market prices discounted by both the out-of-pocket costs and any additional costs incurred (overhead, idle capacity). This option solves the conflict faced by Birch and allows the company to make optimal decision that maximizes profits.
Question #2. Which bid is in the best interests of Birch Paper?
In order to answer the question above I analyzed what is the actual costs incurred and profits generated in each bid. Below is a summary of each bid: …show more content…
Consequently, this is the bid that is in the best interest of Birch Paper, as the company will be able to generated higher profits.
Question #3. Should the commercial vice-president intervene? If so, why?
Under the current transfer pricing policy and rewarding system the commercial vice-president should intervene to make the Northern Division purchase the product from the Thompson
Division. As presented in question #2, the Thompson Division bid is the one that represents the lowest cost to be incurred by Birch Papers, and consequently is the one that maximizes the profit generated by the company. However, the vice-president should allow the Northern Division purchase the product from the Thompson Division at a price of $430, which is the market price, and not $480, in order to be fair and coherent with the rules in place. This decision would make the rules clearer and would avoid incentivizing any division to sell transfer goods for more than
market price, which is not the internal policy of the company. If the vice-president decides