Birch Case--summary

Background: Birch Paper Company is a large and vertically integrated paper company. It has three products: white paper, Kraft paper and paperboard. The company has four producing divisions and a timberland division (supplies pulp). Each division is operated by its manager independently, and each of them is assessed based on its profit and return on investment. A decentralizing policy has been applied by top management, which has increase corporate profits and competitive position.

Situation: Thompson division designed a box for Northern division. Each box includes three parts: an inside linerboard, an outside linerboard, and the corrugating medium. Northern division paid for Thompson only the out of pocket cost of its design and development work. After that, Northern has three offers from Thompson and other two outside companies West and Erie. Usually, managers have rights to choose suppliers of materials freely, and may get sales price inside Birch. There are three bids:
1) The bid from Thompson is $480. If Thompson gets the offer, it will buy most of materials from inside Birch. These materials will cost 70% of out-of-pocket costs of $400, and is equivalent to 60% of selling price.
2) The bid from Eire Paper is $430. If Eire gets the offer, it will purchase the outside linerboard from Birch and use its own inside linerboard and corrugating medium. The outside linerboard will cost $120 a gross ($90 is the material from Southern division and $30 is for print from Thompson. And of the $30, $25 is the out of pocket cost).
3) Bid from West Paper is $432.

In the best interest of Birch Company, the manager (Kenton) of Northern should accept from Thompson because it will be the lowest cost for the company. Despite $480 seems the highest price, but actually most material are from inside of the company. Moreover, it will bring down the inventory of Birch Company.