Birch Company

This case was about the transfer price controversy between two divisions: Northern and Thompson Division in Birch Paper Company which was a medium-sized paper company, produced white and kraft papers and paperboard. According to the agreement between two divisions, Thompson Division will design and develop their process to perfect the design, and they will also be reimbursed for that from Northern Division. This agreement did not mean that Northern Division was bound to buy the boxes from Thompson Division; it just simply meant that the design was reimbursed and separated from the cost of selling the boxes to Northern Division. Therefore, Northern Division was free to ask outside bidders for the most competitive price to manufacture those special boxes. During this period, Thompson seemed to lose its battleground due to its highest selling price of $480 per thousand in comparing to the lowest offering bid of $430 a thousand from West Paper Company. If Northern Division accepted the offer of $430 from an outside company, it would save the division $50 a thousand comparing to getting it from Thompson Division. The case did not state that if Thompson Division did not sell to Northern Division, they cannot sell to outside market, and Birch Paper Company's profit may not be optimum. As a result, we assume that Thompson Division can still gain a reasonable profit margin by selling to outside parties. In general, Birch Paper Company organized each division as profit center, so it was encouraging that each division can adjust their own revenues and expenses to be profitable so that it would improve the company's overall profit as well. In short, Northern Division should accept the lowest bid of $430 a thousand from West Paper Company to save the division and the company cost as well. Despite the fact that Eire Papers, Ltd offered to buy from Southern Division and printed from Thompson Division, but it incurred $25 out-of-pocket costs overall. Thompson and Southern Division of Birch can find their customers on open market and sell their products at competitive price. Because Thompson did not incur the customization design cost while selling elsewhere, the price could be relatively cheaper per unit. Thompson could make some desirable profit out of it.

Given such an unusual design and special orders from Northern Division, we did not know how many boxes the Northern Division was buying, and if this kind of order was frequent in the future. Therefore, the vice president should leave the negotiation process between those two divisions. However, in the future, if this happens again, the vice president should start the investigation process to understand why the Southern Division had been running below capacity and had excess inventory and still quoted the market price. They also should look at the quality control process and the marketing department to see if the demand of the product has been decreasing or there was a change in the market trend that influenced the orders. Another problem was that how to minimize the variable costs for one division that could save the overall fixed cost for the company. The reasons why the quoted price from Thompson was higher than the other two companies were due to the high