Birch Paper Case Essay Example for Free

Birch Paper Case EssayThe division cant very(prenominal) hearty show a profit by putting in bids that dont even cover a exquisite share of overheadcosts,let al mavin give us a profit. Birch Paper Company was a medium-sized,partly compound paper company, producing white and kraft papers and paperboard. A portion of its paperboard output was converted into corrugated boxes by the Thompson discussion section, which also printed and colored the outside surface of the boxes. Including Thompson,the companyhad four producingdivisions and a timberland division, which supplied part of the companyspulp requirements. For several geezerhood, eachdivision had beenjudged individually on the basis of its profit and return on investment. Top centeringhad been working to gain effectiveresults from a insurance policy of decentralizing responsibility and authority for all decisionsexcept those relating to general companypolicy. The companys top officials believed that in the past few ye ars the concept of decentralization had been applied success enoughyand that the companysprofits and competitive position definitely had improved.The Northern department had designeda special divulge 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 unmatched 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 developmentwork.When all the specificationswere ready,the Northern Division askedfor bids on the box from the ThompsonDivision and from two outside companies. distrisolelyively division tutor was normally free to buy from whatever supplier he wished, and evenon saleswithin the company, divisions were expectedto meet the liberation market price if they wanted the business. During this period, the profit margins of much(prenominal) converters as the Thompson Division were being squeezed. Thompson,as did many other correspondent 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 made to outside customers. If Thompsongot the severalize from Northern, it probably would buy its linerboard and corrugating medium from the Southern Division of Birch. The walls of a corrugated box This suit was prepared by William Rotch under the supervision of Neil Harlan, Harvard Business School. Copyright 158-001. by the President and Fellows of Harvard College. Harvard Business School case i Case6-2 Birch PaperCompany 2 consist of outside and inside sheets of linerboard sandwiching the fluted corrugating medium.About 70 percent of Thompsons out-of-pocketcostof$four hundred for the order represe ntedthe cost of linerboard and corrugating medium. Though Southern had beenrunning below capacity and had excess inventory, it quoted the market price, which had not observably weakenedas a result of the oversupply. Its out-of-pocket costs on both liner and corrugating medium were about 60 percent of the selling price. The Northern Division receivedbids on the boxesof $480 a thousand from the ThompsonDivision, $430 a thousand from westernmost 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, but 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 Kenton, manager of the Northern Division, d iscussedthe wide discrepancy of bids with Birchs commercialvice 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 than 10 percent over the going market? sagacious that Mr. Brunner on occasionin the past 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 statement 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 various divisions. He remembereda comment that the ascendancy had m ade at a meeting the week before to the effect that costs which were variable for one division could be largely fIXedfor the companyas a whole.He knew that in the absence of specific orders from top management Mr. Kenton would acceptthe lowest 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 less 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 best 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 dysfunctional? Doesthis problem call for somechange,or changes, the tr ansin fer pricing policy of the overall firm? If so, what specific changesdo you suggest?