Birch Paper Case Essay

The piece cant genuinely well show a internet by putting in volunteers that dupet even cover a fair share of overheadcosts,let alone go a take a leakst us a profit. whip w wholly subject Comp each was a forte-sized,partly integrated paper come with, producing white and kraft text file and paperboard. A portion of its paperboard output was converted into fold up strokees by the Thompson family, which also printed and blue the out-of-door surface of the boxes. Including Thompson,the companyhad four producingdivisions and a timberland division, which supplied part of the companyspulp requirements.For several(prenominal)years, eachdivision had beenjudged severally on the basis of its profit and egest on investiture. Top managementhad been working to gain effective leave alones from a insurance policy of bonnyralizing right and authority for all decisionsexcept those relating to overall companypolicy. The companys pass away officials believed that in the knightly f ew years the concept of decentralisation had been applied success wide-cutyand that the companysprofits and competitive persuasion definitely had improved.The blue subdivision had designeda spare display box for one of its papers in conjunction with the ThompsonDivision, which was equippedto make the box. Thompsonsstaff for packagedesign and developmentspent several months perfecting the design, production methods,and materials to be used. Becauseof the unusual contort and shape, these were far from standard. According to an agreement between the two divisions, the Thompson Division was reimbursed by the Northern Division for the cost of its design and developmentwork.When all the specificationswere prepared,the Northern Division askedfor pop the questions on the box from the ThompsonDivision and from two outside companies. Each division manager was normally free to profane from whatever supplier he wished, and evenon saleswithin the company, divisions were expectedto image the pass marketplace price if they cherished the business. During this period, the profit margins of such converters as the Thompson Division were being squeezed. Thompson,as did many opposite quasi(prenominal) converters,bought its paperboard,and its function was to print, cut, and shapeit into boxes.Though it bought most of its materials from other Birch divisions, most of Thompsonssaleswere make to outside customers. If Thompsongot the order from Northern, it probably would buy its liningboard and corrugating medium from the gray Division of Birch. The walls of a corrugated box This case was prepared by William Rotch under the supervision of Neil Harlan, Harvard Business give instruction. copyright 158-001. by the President and Fellows of Harvard College. Harvard Business School case i Case6-2 Birch newspaperCompany 2 consist of outside and inside sheets of linerboard sandwiching the fluted corrugating medium. about(predicate) 70 percent of Thompsons out-of-pocketcosto f$ cd for the order representedthe cost of linerboard and corrugating medium. Though Southern had beenrunning below capacity and had excess inventory, it quoted the market price, which had not noticeably weakenedas a result of the oversupply. Its out-of-pocket costs on twain liner and corrugating medium were about 60 percent of the selling price. The Northern Division received gamblings on the boxesof $480 a thousand from the ThompsonDivision, $430 a thousand from West Paper Company,and $432 a thousand from Eire Papers,Ltd.Eire Papers offered to buy from Birch the outside linerboard with the specialprinting already on it, notwithstanding would supply its own inside liner and corrugating medium. The outside liner would be supplied by the Southern Division at a price equivalent of $90 a thousand boxes,and it would be printed for $30 a thousand by the Thompson Division. Of the $30, about $25 would be out-of-pocketcosts. Since this situation appearedto be a little unusual, William Ken ton, manager of the Northern Division, discussedthe commodious discrepancy of bids with Birchs commercial vice president.He told the vice presidentWe sell in a very competitivemarket, where higher costscannot be passedon. How canwe be expectedto show a decent profit and return on investment if we have to buy our supplies at more(prenominal) than 10 percent over the going market? Knowing that Mr. Brunner on occasionin the by few months had beenunable to operate the Thompson Division at capacity,it seemedodd to the vice president that Mr. Brunner would add the full 20 percent overheadand profit chargeto his out-of-pocketcosts. When he was asked about this, Mr.Brunners answer was the education that appears at the beginning of the case. He went on to say that having donethe developmentalwork on the box, and having receivedno profit on that, he felt entitled to a goodmarkup on the production of the box itself. The vice president explored further the cost structures of the unlike di visions. He remembereda comment that the controller had made at a meeting the workweek before to the effect that costs which were inconsistent for one division could be largely fIXedfor the companyas a whole.He knew that in the absence seizure of specific orders from top management Mr. Kenton would acceptthe last bid, which was that of the West Paper Companyfor $430. However,it would be possiblefor top managementto order the acceptance another bid if the situof ation warranted such action. And though the volume representedby the transactionsin questionwas little than 5 percent of the volume of any of the divisions involved, other transactions would conceivablyraise similar problemslater.Questions 1. Which bid should Northern Division acceptthat is in the beat out interests of Birch Paper Company? 2. Should Mr. Kenton acceptthis bid? Why or why not? 3. Should the vice president of Birch Paper Companytake any action? 4. In the controversydescribed,how,if at all, is the transfer price system impaired? Doesthis problem call for somechange,or changes, the transin fer pricing policy of the overall firm? If so, what specific changesdo you signal?