Birch Paper Company

1) Market-based

2) Negotiated

3) Cost-based

1. Which bid should Northern accept?

The bid that Northern Division will accept is the bid of the Wester Paper company. This $430.00 is the lowest bid compare to $480.00 (Thompson) and $432.00 (Eire Papers). So, this is the best for the Northern Division. The profit of the Northern Division will be the highest by taking this bid. As per context, each division will be judge independently on their profit and return on investment. So, the goal of the division is to have their divisional profit as high as possible. if the Northern Division accept another bid than that of the Wester Paper company their divisional profit will be smaller. Besides this, each division manager is free to choose from which supplier he wants to buy. so, the division manager of the Northern Division will choose to buy from the Wester Paper company.

2. Which bid is in the best interest of Birch Paper Company?

Details of Thompson’s Quote:

Thompson’s Variable Cost:                               $400.00

(Less) Supply from Southern Div., @70%:        $280.00

Internal Cost of Thompson:                               $120.00

Add: 20% Manufacturing OH Cost + Profit:       $  80.00

Total Quote                                             $480.00

If we apply Cost to the whole Company, the cost will be:

Southern Variable Cost ($280.00*60%):            $168.00

Internal Cost of Thompson:                                $120.00

Total cost applied to the whole company:          $288.00

In this respect, from whole Company point of view, the best bid for whole company would be with Thompson, as we already mentioned, the lowest cost which would be applied is $288.00, compare to West Paper $430.00 and $432.00 for Eire Papers. since Thompson represents the lowest variable cost to Birch Paper Company.  As well, if the Northern Division chooses the Thompson division then it may avoid other costs that may be incurred from picking an external supplier.

3. Should the commercial vice-president intervene? If so, how?

The vice president of Birch Paper should take some action 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.

If vice president does not intervene, Northern Division Will go ahead and buy from Erie Papers. This will lead to nominal profits of $36 to Southern Division and $5 to Thomson as Erie will buy a few items from them to complete the order. But, this will not take care of the continuously incurring fixed costs. Therefore, to encourage cleaning up of internal inefficiencies he needs to redirect the transfer pricing policy to make them focus on overall company profitability. As in this case, if Northern Division Buys from Erie only that Division will save $50.00, however if vice president forces Thompson and southern to transfer the products on Variable cost then the company will save $142 ($430 -$ 288). This savings can be then divided amongst the three Divisions.