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Birch Paper Company Presentation

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by

Nada Badran

on 5 November 2013

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Transcript of Birch Paper Company Presentation

BIRCH PAPER
COMPANY

Background
Birch was a medium-sized, partly integrated paper company.

Produced 3 products:
1. White paper
2. Kraft papers
3. Paperboard

Decentralized responsibility for all decisions except those relating to overall company policy.

Each division is judged independently by:

Scenario
1) Special Display Box:
Northern Division (ND) designed a special display box
for one of its papers in conjunction with the Thompson
Division (TD), which was equipped to make the box.

2) Agreement: TD was to be reimbursed by ND for the cost of its
design and development work
3) ND asks for bids from the Thompson Division, West Paper Company
and Eire Papers
Bids Please:
Bids Please:
Eire Papers bought its outside linerboard (from SD) with the special printing (from TD) from Birch but supplied its own inside liner and corrugating medium.
Bids Please:
Thompson would probably buy its linerboard and corrugating medium from SD and complete the rest of the work throughout its division.
SO
Bid Comparison
As each division is judged independently on the basis of its profit and ROI, Northern Division would probably opt to obtain the box from West Paper Co. as it maximizes their profitability
SO.....
from a DIVISIONAL COMPANY PERSPECTIVE...
ND should buy the corrugated box from the West Paper Co.

If the divisions keep the policy of choosing their suppliers based on the prevalent market price, Kenton shouldn’t accept TD's bid, since the internal quote is $ 50.00 higher compared to the most competitive market price ($430 VS $480).

The Northern division should not have to incur higher purchase costs because Thompson and Southern can't meet the market prices.

from an OVERALL COMPANY PERSPECTIVE
ND should buy the corrugated box from TD
The VP should realize that the current division profit-based decision making may sometimes conflict with the overall company's profitability
(Costs of $430 VS $288)

THEREFORE...

a further evaluation of the company's operations and pricing mechanisms is needed to avoid similar problems and ensure long-term profitability.




*If top management does not intervene
Conflict Resolution
There may be circumstances in which business divisions will not be able to agree on a price. Therefore, companies should ensure that there are procedures in place for arbitrating transfer price disputes.
1) By assigning responsibility to the Financial Vice President or Executive Vice President
OR
2) By establishing a board whose responsibility is to settle transfer disputes
HOW?
Conflict Resolution Methods
There are different processes established in order to resolve conflicts:
forcing, smoothing, bargaining and problem solving.
The CHOICE of conflict resolution method depends on a large extent on the frequency of intracompany transfers as well as the current market environment (competitors and prices).

Rule of Thumb:
The greater the no. of intracompany transfers and market info
the more formal and specific the rules must be
Org Chart
Key Takeaways
3) At first, it appears that the Thompson division is charging a significantly higher price for its services AS OPPOSED TO the cheaper market.

However, when evaluating the margins of each division individually, Southern (which provides for TD) is actually the main culprit.

Key Takeaways
4) TD should review the validity of the proposed quotations from SD ESPECIALLY given that
BOTH are running below capacity.

The norm also indicates that excess inventory should be sold at a lower than market price
in order to generate sales and lower inventory/carrying costs.

Rejecting the contract and choosing an alternate vendor would be dysfunctional to the
company as a whole given that both divisions have available capacity.
Key Takeaways
1) There are many pros and cons to top management intervention.

* On one hand, if the VP gets involved in the decision making, division managers may feel that their autonomy and authority are undermined.

* On the other, there may be potential cost savings yielding higher company profits.

2) 'Volume represented by transactions in question was less than 5%,...future transactions could conceivably raise similar problems'

Possible reoccurrence in the future could warrant intervention avoiding
future problems.
Thank you

Any questions?
Transfer Pricing
The price charged when one division of the company provides goods and services to another division of the same company.
is...
1) Market-based
2) Negotiated
3) Cost-based
4) Dual
Types:
Full transcript