1. Which bid should Mr. Kenton accept?
The bid that the northern division would accept would be the bid of the west paper company,
as the lowest bid is provided by the west paper company of $430. The profit margin for the
Northern Division would be the highest through this bid, as each division would be judged
independently so the goal is to have a high divisional profit. As the division managers are free
to choose the supplier the Division manager of the Northern Division will buy from the West
Paper company.
2. Which bid is in the best interest of Birch Paper Company?
The bid which is in the best interest of the Birch Paper Company is the bid of the Thompson
division as the cost of the Birch paper company will be the lowest by accepting the Thompson
Division bid.
Cost if accepting the bid of Eire Papers: $432
Cost if accepting the bid of West Papers: $430
If we buy from Eire Papers:
They will buy from birch company (Southern Division) outside linerboard for $90 The Cost
for southern division is 60% of SP i.e., $54. Making the profit of the company $36.
Eire will print the outside liner from Thompson Division for $30 out of which $25 is the cost
to Thompson Division and $5 is the profit.
Cost of bid of Eire Papers: 432 + 54 + 25 = 511
Price earned by the Birch company = 30 + 90 = 120
Cost to Birch company = 511 – 120 = 391.
Cost if Thompson Division is accepted:
Most of the cost will be out of pocket so,
Southern Division = 400*70%*60% = $168
Thompson Division = 400 – (400*70%) = $120
Therefore, the cost to the Birch company is = 168 + 120 = $288.
Best Interest:
The cost of the Birch company is the lowest by accepting the bid of the Thompson Division.
3. Should the commercial vice-president intervene? If so, how?
The Concept of decentralization had been successfully applied in the past few years
contributing in the improvement of profits and competitive position. Intervening by the Vice
President will distort the concept of decentralization but since the volume of transaction was
less than 5% of the volume of any of the division involved, the vice president will have to
intervene, because if the doesn’t the Northern division will choose the west paper bid. Choosing
the west paper bid is not the optimal choice as future transactions could receive similar
problems. Therefore, the vice president should intervene.
Case 2
Ques 1
Total Actual Cost = 21224
Variable Costs for 103= Compensation Insurance+ Direct Labour+ Power+ Materials +
Supplies + Repairs – Other Income
Total Cost (after dropping 103)= 18712
Total Revenue (after dropping 103) = 16179
Loss= 16179-18712 = 2533
$2.533 million Loss
Ques 2
Old Variable Cost = 148+2321+40+1372+94+32 = 4007 k
New Variable Cost = 148+2321+40+(1372+94)*1.05 +32 = 4080.3 k
Old Contribution = 9.41*750-4007 = 3050.5 k
New Contribution = 8.64*1000-4080.3 = 4559.7 k
Since the contribution margin is higher at 8.64$ therefore the company should decrease price.
Ques 3
Profit is dependent on Total Contribution, because a product with higher contribution margin
but lower sales won’t be able to give profits to the company.
Hence, Actual total contribution decides profitability of the product.
Thus, Product 101 is the most profitable product.
Ques 4
• The Rent, Property Taxes, Property Insurance, Indirect Labour Cost, Selling Expense,
General Administrative Expense, Depreciation & Interests are the fixed costs which
were appropriated to all the three products based on the production to get the standard
costs.
• But the actual fixed costs were the same irrespective of the production, (which can be
observed by comparing the Total Actual Costs for 6 months of 2004 {exhibit 4} and
the Total Costs for 12 months of 2003 {exhibit 2} for the above fixed costs) thus this
resulted in variance of the expected costs. Hence, as the total cost turned out lower than
the standard cost, which caused the profit.