Dharma Putranto
Dendy Fikosasono
Jemy Yapola
Robby S Irawan
Yuli Rosiana
BIRCH PAPER
COMPANY
NORTHERN
DIVISION
THOMPSON
DIVISION
SOUTHERN
DIVISION
X 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 $ 430
Eire 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 $ 480
Contribution of profit from Southern
$ 400 x 70% x 40% = $112
Contribution of profit from Thompson
$ 480 - $ 400 = $ 80
Total 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
Southern’s selling price to Thompson
(transfer pricing: 70% x $ 400)
Other overhead costs (outsider suppliers)

SOUTHERN DIVISION :
Southern’s out-of-pocket costs
(60% x $ 280)
Southern’s profit
($ 280 - $ 168 = $ 112)
= $ 400
= $ 280
----------- = $ 120
= $ 168
= $ 112  67% ($ 112/$ 168)
-
Southern
division
should
reduce
percentage of its profit lower than 67 %
the
-
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
(new out-of-pocket costs: $ 430 / 1.2 = $ 358.33)
Other overhead costs (outsider suppliers)
= $ 358.33
= $ 120
----------- New Southern’s selling price to Thompson Division= $ 238.33

SOUTHERN DIVISION :
Southern’s out-of-pocket costs
(60% x $ 280)
New Southern’s profit
/ $ 168)
($ 238.33 - $ 168 = $ 70.33)
= $ 168
= $ 70.33 42% ($ 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