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Birch Paper Company

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by

Megan Law

on 8 July 2011

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Transcript of Birch Paper Company

How can we justify our price of $280/thousand to Thompson? Judged individually on profit and ROI Decentralized responsibility Divisions selling to other divisions expected to meet going market price Are we willing to sell to Thompson at a lower Price? NO We are evaluated on ROI and profit and the transfer price directly affects the evaluation of our company and the decisions we make The lower the transfer price, the lower the ROI and profit will be The opportunity cost of lowering our selling price to Thompson is too big because Eire is willing to buy the Linerboard from us for $90/thousand Yes Birch Paper Company Southern Division Junior Aguaze
Abdulla Al-Ansari
Katherine Gao
Megan Law
Felipe Million
Chad Summe Section 3 Team 2 It Depends!!! Question to ask yourself....

Is there a market for my product or not? Transfer Pricing General Principle: If an intermediate market exists, the optimal transfer price is the market price
If no intermediate market exists, the optimal transfer price is the outlay cost for producing the goods (generally, the variable costs) If there is an intermediate market for our product, we have to calculate the opportunity cost Opportunity cost = Market Price - Selling Price If there is no intermediate market for our product, we have to calculate the acceptable price range we are willing and able to accept from a sister company In order to determine the optimal transfer price, you have to ask yourself three questions: 1. Given the market prices and the cost in the firm, does the transfer increase FIRM profit? 2. Given the transfer price, the intermediate market prices, and the divisional costs, does the transfer increase the SELLING division profit? 3. Given the transfer price, the final market prices, and the divisional costs, does the transfer increase BUYING division profit? Based on the general principle, the optimal transfer price is the market price When excess capacity exists, our transfer pricing range that is acceptable is one in which all variable costs will be covered CM = Revenues - Variable Costs Fixed costs will not change; therefore, as long as a positive contribution margin still exists, net profit and ROI will not decline We will give Thompson a discount on the corrugating medium only. The price maximum will be $190 (market price) and the price minimum will be $114 (total variable cost).

The final selling price will have to be determined through negotiations with Thompson management.

For the linerboard, we cannot afford to offer a discount due to the fact that Eire is willing to purchase this from us at market price. Our Pricing Decision
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