Birch Paper Company was a medium-sized, partly integrated paper company, producing white and kraft papers and paperboard

[answerhappygod]

Birch Paper Company was a medium-sized, partly integrated paper
company, producing white and kraft papers and paperboard. A portion
of its paperboard output was converted into corrugated boxes by the
Thompson division, which also printed and colored the outside
surface of the boxes. Including Thompson, the company had four
producing divisions and a timberland division that supplied part of
the company’s pulp requirements. For several years each division
had been judged independently on the basis of its profit and return
on investment. Top management had been working to gain effective
results from a policy of decentralizing responsibility and
authority for all decisions except those relating to overall
company policy. The company’s top officials believed that in the
past few years the concept of decentralization had been
successfully applied and the company’s profits and competitive
position had definitely improved. Early in 2007 the Northern
division designed a special display box for one of its papers in
conjunction with the Thompson division, which was equipped to make
the box. Thompson’s staff for package design and development spent
several months perfecting the design, production methods, and
materials that were to be used. Because of the box’s unusual color
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 development
work. When the specifications were all prepared, the Northern
division asked for bids on the corrugated box from the Thompson
division and from two outside companies. Each Birch Paper Company
division manager normally was free to buy from whatever supplier he
wished; on inter-company sales, divisions selling to other
divisions were expected to meet the going market price. In 2007,
the profit margins of converters such as the Thompson division were
being squeezed. Thompson, as did many other similar converters,
bought its paperboard and linerboard used in making boxes, and its
function was to print, cut, and shape the material into boxes. (The
walls of a corrugated box consist of outside and inside sheets of
linerboard and a center layer of fluted corrugating medium.)
Although it bought most of its materials from other Birch
divisions, most of Thomson’s sales were made to outside customers.
If Thompson got the order from Northern, it probably would buy its
linerboard and corrugating medium from the Southern division of
Birch. Thus, before giving its bid to Northern, Thompson got a
quote for materials from the Southern Division. Although Southern
had been running below capacity and had excess inventory, it quoted
the prevailing market price for materials. Southern’s out-of-pocket
costs for both liner and corrugating medium were about 60% of its
selling price. About 70% of Thompson’s out-ofpocket cost of $400
per thousand boxes represented the cost of linerboard and
corrugating medium. The Northern division received bids on the
boxes of $480 per thousand from the Thompson division, $430 per
thousand from West Paper Company, and $432 per thousand from Eire
Papers, Ltd. Eire Papers offered to buy from Birch the outside
linerboard and the special printing already on it, but it 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 per thousand boxes, and would be printed for $30
per thousand by the Thompson division. Of the $30, about $25 would
be out-ofpocket costs. Since this bidding results appeared to be a
little unusual, William Kenton, manager of the Northern division,
discussed the wide discrepancy of bids with Birch’s commercial vice
president. He told the vice president, “We sell in a very
competitive market, where higher costs cannot be passed on. How can
we be expected to show a decent profit and return on investment if
we have to buy our supplies at more than 10% over the going
market?” Knowing that Mr. Brunner had been unable to operate the
Thompson division at capacity on occasion during the past few
months, it seemed odd to the vice president that Mr. Brunner would
add the full 20% overhead and profit charge to his out-of-pocket
costs. When he asked Mr. Brunner about this, the answer was the
statement that appears at the beginning of the case. Brunner went
on to say that, having done the developmental work on the box and
having received no profit on that work, he felt entitled to a good
markup on the production of the box itself. The vice president
explored further the cost structure of the various divisions. He
remembered a comment of the controller at a meeting the week
before, to the effect that costs which were variable for one
division could be largely fixed for the company as a whole. He knew
that in the absence of specific orders from top management, Mr.
Kenton would accept the lowest bid, which was that of the West
Paper Company for $430. However, it would be possible for top
management to order the acceptance of another bid if the situation
warranted such action. And although the volume represented by the
transactions in question was less than 5% of the volume of any of
the divisions involved, future transactions could conceivably raise
similar problems.
Questions 1. Describe three alternative bids and their cost
structures.
2. Which bid should Mr. Kenton accept?
3. Which bid is in the best interest of Birch Paper Company?
4. Why isn’t Mr. Brunner bidding $430? Explain the possible
reasons
5. Should the commercial vice-president intervene? Make
arguments in favor of intervention. Also make arguments against
intervention. ? If you were the vice-president, would you
intervene? Why or why not?
6. In case of intervention, how should the vice-president
determine the transfer price