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
perfecting
methods

Southern Division: produce linerboard

and corrugating medium and sometimes
sell to Thompson division

Division: package design,

the
design,
production

For several years, each division had been

judged independently on the basis of its
profit and return on investment
The
companys
top
management
believed that the companys profits and
competitive
position
definitely
had
improved
Most of Thompsons 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

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 Eires 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 companys 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:
Thompsons selling price to Northern Division = $ 480 20%
profit margin
(profit margin: ($ 480 - $ 400)/ $ 400 = 20%)

Thompsons out-of-pocket costs

= $ 400
Southerns selling price to Thompson
(transfer pricing: 70% x $ 400)
= $ 280
----------- Other overhead costs (outsider suppliers)
= $ 120

SOUTHERN DIVISION :
Southerns out-of-pocket costs
= $ 168
(60% x $ 280)
Southerns profit
= $ 112 67% ($ 112/$ 168)
($ 280 - $ 168 = $ 112)

Southern division should reduce the

percentage of its profit lower than 67 %

Thompson divisions profit cant 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:
Thompsons selling price to Northern Division = $ 430 20%
profit margin

Thompsons out-of-pocket costs

= $ 358.33
(new out-of-pocket costs: $ 430 / 1.2 = $ 358.33)
Other overhead costs (outsider suppliers) = $ 120
----------- New Southerns selling price to Thompson Division= $
238.33

SOUTHERN DIVISION :
Southerns out-of-pocket costs
= $ 168
(60% x $ 280)
New Southerns profit = $ 70.33 42% ($ 70.33 / $ 168)
($ 238.33 - $ 168 = $ 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