Birch Paper Company Management Control System

1. Birch Paper
Company
Almalia Hardy (10312039)
Lariza Selvi
Meilisa Nur Sahar
Nur Mazkiyani

2. Background
• Medium sized, partly integrated company
• Three product; white and Kraft papers and
paperboard
Birch
Northern Southern Thompson Division 4 Division 4

3. Working and Assessment
• Judgment based on the basis of its profit and
return on investment (ROI)
• Concept of decentralization-both authority
and responsibility
• Improvement attributed to above factor

4. Situation
• Northern and Thompson division together
designed box for Northern division
• Thompson division was reimbursed by Northern
division for it’s designing and development
• After finalization, apart from Thompson’s bid it
also get offers from two outside companies
• Company policy where each division manager had
full freedom and discretion to buy from anywhere

5. Cont.
• Thompson’s most materials from within
company but sales mostly outsiders
• If Thompson gets bid materials to be procured
from Southern division
• 70% of out of pocket costs of $400 were above
materials
• This constituted 60% of selling price

6. The Northern division
received bids on 1000 boxes
• From Thompson division - $480
• From West Paper Company - $430
• From Eire Paper Company - $432

7. Eire paper Company and
dilemma
• It would buy outside linear board from Birch
with special printing (to be done by
Thompson) $90 (a thousand boxes) and $30
for printing.
• “Competitive market where higher costs
cannot be passed on, how can we buy own
supplies @10% higher than market rate.

8. Other Factors
• Thompson division felt not received profit for
their development work, hence entitled to mark
up on production of box
• “Cost variable for one division could be largely
fixed for company as a whole”
• Without orders from top management Kenton
would accept the lowest bid
• Transaction involved only 5% of volume of divisions
involved

9. Which bid should Northern division accept
that is in best interest of the company?
• Thompson division
• In the calculation out the cost that Thompson
actually has the lowest costs associated with
them

10. Cost involved
• Costs for Thompson are; Linear board and
corrugating medium: Cost $400x70%x60%=$168
plus out of pocket: $400x30%=$120, for a total
cost $288
• Cost for West Paper would be a total $430
• Cost for Eire Papers would be $90x60%=$54
(Southern) plus $25 (Thompson), and their
supplies of $432-5-36=$391, total cost $470

11. Should Mr. Kenton
accept this bid?
• Mr. Kenton should not accept the bid from
West Paper because it is not in the best
interest of the company, but at the same time
with the transfer policy that exists, it is really
up to him what is in the best interest of his
division. Mr. Kenton should accept the bid
from Thompson because not only will result in
the lowest cost but also it will encourage
buying from within the company

12. Vice president action
• Yes the vice president should take any action.
As if no orders come from top management
Kenton would accept the lowest bid
• The vice president of the Birch should take
action in order to remedy the overall problems
associated with this transfer pricing policy

13. Is transfer pricing system
dysfunctional?
• Yes
• The transfer price system is dysfunctional
because it focuses too much on individual
sectors making profit and return on
investment
• Some alternative should be present which
strikes a balance between both