...Homework – Birch Paper Company 1) Fill in the missing prices and costs on the “Diagram of the alternatives” and “Costs of the alternatives” which are attached. On the “Diagram of the alternatives”, fill in the amounts indicated in the nine dotted ovals. Some amounts may be easy to find in the case, some will need to be computed from case information, and some you will not be able to ascertain from case data; for the latter, write “don’t know”. On the “Costs of the alternatives”, complete the table using relevant amounts from the “Diagram of the alternatives”, and compute the net cost to Birch for each of the three choices. NOTE: In the case, the term “out-of-pocket costs” means variable costs. 2) On your completed “Diagram of the alternatives”, indicate which bid Mr. Kenton (Northern Division) will accept (based purely on economic considerations) by circling it and labeling it accordingly. 3) On your completed “Costs of the alternatives”, indicate which alternative is in the best interest of Birch Paper as a whole (based purely on economic considerations) by circling it and labeling it accordingly. Section: D Name: Amanda Wang Section: D Name: Amanda Wang 9) 9) 8) 8) 6) 6) 5) 5) 4) 4) 2) 2) 1) 1) 7) 7) 3) 3) 280 120 280 120 90 don’t know 90 don’t know 30 25 30 25 480 480 TP: $ (market price) TP: $ (full cost) Price: $ Price: $ Price: $ VC: $ NORTHERN (William...
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...The Birch Paper Case This case was about the decision that Mr. William Kenton, the manager of the Northern division of the Birch Company had to make regarding the purchase of specialty boxes. Mr. Kenton had received three bids. The first was from the Thompson division of the Birch Company for the amount of $512 per thousand boxes, the second was from West Paper Company in the amount of $460 per thousand boxes, and the last was from Eire Paper Company in the amount of $442 per thousand boxes. Now the task for Mr. Kenton was to choose the offer that was in the best interest of the company. At first glance it would seem that the bid that should be accepted is the one made by Eire Paper Company because it was the lowest bid and had more room for profitability. Although the Eire Paper Company had the lowest bid if we evaluated the bid based on cost it would be as follows. The Thompson division would be $168($400 * 70%)* 60% added to $120($400 * 30%) to make it $288 of out of pocket cost, West Paper Company would be $460, and Eire Paper Company’s would be $401($442-$5-$36). The bid that would have been in the best interest of the Birch Company, if the divisions weren’t considered separate financial entities, is one from the Thompson Division. However, the Thompson division has its own goals in the company and accepting its bid would not be profitable for the Northern division. Since all the divisions of the Birch Company are judged on their own merits the Northern division and...
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...Birch Paper Company Relevant Information & Equations 1) Birch Paper Company is a producer of paper, paperboard, and corrugated boxes. The company is integrated, consisting of four separate production divisions. One of its divisions, Northern Division, asked for bids on a special corrugated box. It requested bids from one of its sister division (Thompson Division) and from two outside companies. The issue at hand is whether Northern should accept a bid from its sister division or from one of the outside companies. It should be noted that Thompsons bid is substantially higher than the bids received from the outside company. Relevant information pertaining to the three bids are provided below. 2) Thompson Division a) Bid $510 per 1000 boxes b) Thompson is marking the product up by 24.5% for a profit of $100. - $410 x 24.5% = $510 per 1000 boxes c) Thompson’s out of pocket expenses per 1000 boxes amount to $410 - 75% or $307.50 of the $410 represents the cost of linerboard and corrugating medium which will be purchased from its sister division Southern. That leaves $102.50 remaining and designated to other out of pocket costs per 1000 boxes. - $410 x 75% = $307.50; $410 - $307.50 = $102.50 out of pocket costs per 1000 boxes. d) If Thompson gets the order from Northern it will buy its linerboard and corrugating medium from the Southern Division of Birch. - Southern’s out of pocket costs for both liner and corrugating medium were about 65% of its...
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...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...
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...CASE STUDY Chapter SIX CASE 6-1 Case Study on “Transfer Pricing Problems” Case SUMMARY Division A of Lambda Company manufactures product X, which is sold to Division B as a component of product Y. Product Y is sold to Division C, which uses it as a component of Product Z. Product Z is also sold to customers outside of the Company. The intracompany pricing rule is that product are transferred between divisions as standard cost plus 10 percent return on inventories and fixed assets. Case Questions Question a: with transfer price calculated in Problem 1, is Division C better advised to maintain its price at $28 or follow competition in each of the instances above? Answer: Under possible competitive price $27.00 If company maintain the price at $28, the profit=(28-23.6) ×9,000=39,600 If company follow the possible competitive price at $27, the profit= (27-23.6) ×10,000=34,000 Under possible competitive price $26.00 If company maintain the price at $28, the profit=(28-23.6) ×7,000=30,800 If company follow the possible competitive price at $26, the profit= (26-23.6) ×10,000=24,000 Under possible competitive price $25.00 If company maintain the price at $28, the profit=(28-23.6) ×5,000=22,000 If company follow the possible competitive price at $25, the profit= (25-23.6) ×10,000=14,000 Under possible competitive...
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...GOA INSTITUTE OF MANAGEMENT Birch Paper Company Submitted by, Chandra Mouli Kavi Section C Roll no. 2010132 1. What is the immediate economic impact to the company of sourcing the product to either WEST PAPER or EIRE? Mr. William Kenton, manager of the Northern Division, should be permitted to choose the alternative that is in Northern division's own interests. The transfer price policy gives him the right to deal with either insiders or outsiders at his discretion. If he is unable to get a satisfactory price from the inside source, which is Thompson division, he should be free to buy from outside. The three bids from Thompson division, West Paper Company and Eire Paper Company are $480, $430 and $432 respectively. Below mentioned are the costs involved while taking Thompson division, West Paper Company and Eire Paper Company into consideration. a) Costs for Thompson division Linearboard and corrugating medium : $400 x 70% x 60% = $168 Out of Pocket Total Cost : $400x30%=120 : $288 b) Costs for West Papers = $430 c) Costs for Eire Papers Outside Linear (Southern) Printing (Thompson division) Own Supplies Total Cost : $90x60%= $54 : $25 : $312 : $391 Since all the transfer prices in the company are calculated at costs, the Northern Division should accept the bid for Thompson division as it has the lowest costs. Accepting the bid based on lowest costs would also enable Birch Paper Company to earn the highest profits available. 2. What are the possible...
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...Birch Paper Company Question 1 Which bid should Northern Division on accept that is in the best interests of Birch paper company? Answer: Thompson division even through the bid from west paper seems at first to be the best choice. In you calculate out the cost you find that Thompson actually has the lowest costs associated with them. Cost involved: ✓ Costs for Thompson are a:Linearboard and corrugating medium: cost $ 400x 70% * 60% - $168 plus out of pocket: $400x 30% = 120, for a total cost of $ 288. ✓ Cost for west papers would be a total of $ 430. ✓ Cost for Eire papers would be $ 90x 60% - $ 54 (Southern) plus $ 25 (Thompson), and their supplies of $ 432 – 5 - 432 = $ 312 for a total of $ 391. Question 2 Should Mr. Kenton accept this bid? Why or why not? Answer: Mr. Kenton should not accept the bid from west because it isn’t in the best interest of the company, but at the same time with the transfer policy that exists, it is really up to him what is in the best interests of his division. I believe he should accept the bid from Thompson because not only will it result in the lowest cost, but also it will encourage buying from within the company. Question 3 Should the vice president of Birch paper company take any action? Answer: Yes. As if no orders come from top management Kenton would accept the lowest bid. The vice president of Birch should take action in order to remedy the overall problems associated with this transfer pricing...
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...Birch Paper Company - ( Pg. No. 254 ) ( Transfer Pricing ) Basics: Quotes per 1000 boxes: Thompson - $480/- West Paper - $432/- Eire Papers - $430/- So prima facie Eire’s quote is the lowest Details of Thompson’s Quote: Thompson’s Outof Pocket Exp.: $400.00 (Less) Supply from Southern Div, @70%: $280.00 Hence, Cost of Thompson: $120.00 Add: 20% OH + Profit: $80.00 Total Quote $480.00 However taking Birch Paper Company as a whole, the costing will be: Supply from Southern @ cost (ie less 40%): $168.00 Thomsons own supply w/o markup: $120.00 Total cost to the co.: $288.00 So in the best interest of the co. The offer from Thomson has to be accepted. Q2. If the Transfer price however remains the same, ie $480, and as the divisions are at full liberty to choose their suppliers either from inside or outside based on the Market price, Kenton should not accept the offer of Thompson for obvious reasons as their quote is higher by $ 50.00 than the most competitive Market price. Due to decentralisation policy of the co. and each departments profits are calculated and judged individually, then it is very much acceptable that Northern div. Will not increase its purchase cost due to the hidden inefficiencies of Thomson & Southern div. Which are not capable of meeting the marker prices. Q3. Should the vice president of Birch paper Co. Take any action. Ans. Though the case suggest that the qty. Involved in the subject transaction is less than 5% of any...
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...system of Birch Paper Company particularly on the decentralized operations of its divisions with respect to its overall performance. PROBLEM : What effective management control system or systems should the Company adopt to attain maximum profitability not only of its divisions’ respective operations but that of the Company as a whole? AREAS OF CONSIDERATION 1. Company Background Birch Paper Company is a medium-sized, vertically integrated paper company, producing white and kraft papers and paperboard. It has four producing divisions and a timberland division which supplied part of the company’s pulp requirement; each division is operating independently headed by its respective division managers. Birch’s division managers normally were free to buy materials or inputs from whichever supplier they wished, and even on sales within the company; so divisions were expected to meet the going market price if they wanted the business. Early in the year, its Northern Division designed a special retail display box in conjunction with the Thompson Division, which was equipped to make the box. Thompson, as one of Birch’s four producing divisions converted paperboard output into corrugated boxes. It also printed and colored the outside surface of the boxes. Birch’s Southern Division will supply the lineboard and corrugating medium to Thompson Division in the event the latter got the order from Northern. 2. Decentralization Policy The Company observes...
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...1. Which bid should Mr. Kenton accept? Mr. Kenton should accept the low bid of the West Paper Company at $430 per thousand. He has an obligation to make the best business decisions for his division, which means taking the lowest legitimate and reasonable bid. By accepting the West bid, the division will save 10.4% compared to the bid of the Thompson division. If the Thompson bid were within a few dollars of the low bid, as the one from Eire Paper, it would be more reasonable to accept the bid. Also, it is at least nominally the policy of the Birch Company to accept the lowest bid, since the vice president knows the Kenton will accept the lowest bid barring any outside intervention. It is also the policy of the company to expect that inter-division bids meet the going market rate. By rejecting the Thompson division bid, Mr. Kenton shows Mr. Brunner that he will abide by both policies, and that he won’t accept unreasonably high bids. Mr. Brunner will thus be more likely to make lower bids in the future. 2. Which bid is in the best interest of Birch Paper Company? Although accepting the lowest bid would not be advantageous for the Thompson division, accepting the lowest bid is in best interest of the company. This case does not state the fixed costs that would become sunk costs if the Thompson division were to not produce the boxes, however, the division will not lose profit margin on boxes where production has not even started. Similarly, the Northern Division cannot...
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...Birch Paper Case 3 General ways a decentralized firm can handle transfer pricing 1) Direct intervention by top management - If this were an extraordinarily large order or if internal transfers were rare, this would be the best solution…but this order represents less than 5% of the volume of all divisions involved. - The disadvantage of direct intervention is that top management could become swamped with pricing disputes, and individual division managers lose the flexibility and other advantages of autonomous decision making. 2) Centrally established transfer price policies - Externally based market prices are generally considered the best basis for transfer pricing when a competitive market exists for the product and market prices are readily available. - A drawback is that this method may require a change to the compensation/incentive system of Division managers Market price-based transfer pricing – A policy that sets transfer price at the market price or a small discount from the market price. From the company’s perspective, this is fine as long as the supplying unit is operating at capacity. Cost basis policy – A seller operating below capacity should transfer at the differential cost of production (variable cost). A seller operating at capacity should transfer at the market price. A seller operating below capacity is indifferent between providing the product and receiving a transfer price equal to the seller’s differential outlay cost or not providing...
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... Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing. The firm has entered the death spiral. Activity-Based Costing Case: Destin Brass...
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... Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing. The firm has entered the death spiral. Activity-Based Costing Case: Destin Brass...
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... Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing. The firm has entered the death spiral. Activity-Based Costing Case: Destin Brass...
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...Case Questions for April 10, 2010 Discussion Questions for Birch Paper Company Answer each of the following questions independently. 1. Which bid should Norhern Division accept? 2. Should Thompson Division lower its price? If so, to what? 3. What should the Commercial V.P. do? Case 23-5, Berkshire Industries 1. Were Berkshire’s motivations for a new incentive system reasonable? If so, what were their main options for a new system? Was an economic profit-focused system a reasonable choice? 2. Use the data pertaining to the Snack Food Division, as shown in Exhibit TN- 1, to calculate: a. Economic profit for the division for 2000 and 2001. b. The economic profit target for the division for 2001. c. The division manager’s bonus payout (% of salary) for 2000 and 2001. (Assume that the slope of the payoff line for 2000 was arbitrarily set by Berskshire management to equal 1.0). 3. Assume the base salary of the manager of the Snack Foods Division was ₤120,000 in both 2000 and 2001. How much cash would the manager receive from his bonus payouts in 2000 and 2001? 4. Evaluate the Berkshire Industries’ new incentive plan. What changes would you recommend, if any? 5. Should Mr. Embleton make special adjustments of the economic profit figures or the bonus payouts for personnel in the Spirits Division in 2000 and 2001? Why or why not? Sub-Micron Devices (take-home graded case, not due on April 10) Anwer the questions provided in the...
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