BIRCH PAPER COMPANY

Q1) As Mr. Kenton would you accept this bid? Why or why not?
Ans: I would not accept this bid of West Paper Company because of the following reasons:
In the case of Thomson division,
Thomsons Variable cost = $400x 0.3 = $120
Southerns Variable cost = $400 x 0.7x0.6 = $168
Total Cost to the company = 120+168= $288
In the case of West Paper Company,
Total cost to the company = $430
In the case of Eire Papers, Ltd,
Thomsons total cost = $30
Thomsons variable cost = $25
Southerns total cost = $90
Southerns variable cost = $90x0.6= $54
Total cost to the company = 400 (30-25) (90-54) = $391
From the above analysis, we can see that the lowest cost to the company if they want to buy
is from Thomson Division i.e. $288. Also, the excess inventory of the Southern Division will
not be utilized if it accepts the bid from West Paper Company.
Hence, I would accept the bid of Thompson division due to low cost to the company and the
utilization of excess inventory.

Q2) Should the vice president of Birch Paper company take any action? If so what?
Ans: The Vice President of Birch paper company should take action because of the higher
cost to the company if bought from West Paper Company. He should involve the top
management and order the acceptance of bid from Thompson Division by comparing the cost
to the company of the three options available. He should also take action against the transfer
pricing policy.

Q3) 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?
Ans: Yes the transfer price system in Birch Paper Company is dysfunctional. This is because
there is decentralisation of responsibility and authority for all decisions except those relating
to the overall policy for the company. Due to this, each of the divisions is aiming to maximise
their own profit. This can seem desirable in the short run. However, from a long run
perspective, this will have a negative impact on the organisation as a whole. This is because
each division is focusing only on itself without seeing the impact and the cost on the other
divisions, thus affecting the entire company. This will also start affecting the division-which
is trying to maximise its profit-in the long run.
Due to this, some changes in the transfer pricing policy is needed. There needs to be goal
congruence. All the divisions should work towards a common goal and that is what should be
the priority.

Group Members:
Aashna Aggarwal
Himanshu Suman
Imtiaz Ahmed
Vidhu Joshi
Vishal Chauhan