Birch Paper Case Essay

The division cant very easy show a realise by putting in bids that wearyt even c over a fair share of overheadcosts,let unsocial give us a profit. strap penning Company was a medium-sized,partly integrated paper alliance, producing white and kraft papers and paperboard. A deal out of its paperboard output was converted into corrugated packagees by the Thompson sectionalization, which also printed and colorful the out of doors surface of the boxes. Including Thompson,the companyhad four producingdivisions and a timberland division, which supplied part of the companyspulp requirements.For severalyears, eachdivision had beenjudged independently on the basis of its profit and return on enthronisation. head managementhad been working to gain effectiveresults from a policy of decentralizing responsibility and dominance for all decisionsexcept those relating to overall companypolicy. The companys jacket crown officials believed that in the ult few years the concept of dece ntralization had been applied successfullyand that the companysprofits and warring position definitely had improved.The northern Division had nameeda special 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, merchandise methods,and materials to be used. Becauseof the unusual color and shape, these were far from standard. According to an agreement in the midst of 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 bids on the box from the ThompsonDivision and from two out of doors companies. Each division manager was normally free to buy from any(prenominal) supplier he wished, and evenon saleswithin the company, divisions were expectedto meet the going market place price if they treasured the business. During this period, the profit margins of such converters as the Thompson Division were being squeezed. Thompson,as did many some other standardised converters,bought its paperboard,and its function was to print, cut, and shapeit into boxes.Though it bought virtually of its materials from other Birch divisions, most of Thompsonssaleswere made to outside customers. If Thompsongot the exhibition from Northern, it probably would buy its linerboard and corrugating medium from the Confederate Division of Birch. The walls of a corrugated box This case was prepared by William Rotch under the supervision of Neil Harlan, Harvard employment 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 privileged sheets of linerboard sandwiching the fluted corrugating medium.About 70 percent of Thompsons out-of-pocketcostof$400 for the revisal 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 both liner and corrugating medium were about 60 percent of the exchange price. The Northern Division receivedbids on the boxesof $480 a chiliad from the ThompsonDivision, $430 a super acid 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, 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, discussedthe wide di screpancy of bids with Birchs commercial guilt hot seat.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? Knowing that Mr. Brunner on occasionin the past few months had beenunable to flow 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 didactics 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 controller had made at a meeting the calendar 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 slight 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 transin fe r set policy of the overall firm? If so, what specific changesdo you suggest?