MA_Birch Paper Co.

8/11/2019 MA_Birch Paper Co.

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CASE STUDY



The Birch Paper Company is a mid sizedcompany producing white and craft papersand Paperboard.

The company has four production Divisionand a timberland division.

Each unit of the company is judgedindependently on the basis of its profit & ROI

Company follows concept of decentralizationand believes that it has improved theperformance.



BirchPaper Co.

NorthernDiv.

SouthernDiv.

ThompsonDiv.

Div. 4Timberland

Div



Northern Div Designed special display box forone of its papers in conjunction withNorthern Div.

Thompsons staff spend months in perfectingthe design, production and methods andmaterials to be used.

Paper box had unusual color and shape from

standard.Northern Div. reimbursed the cost of design

and development work to Thompson Div.



The specification of the box all prepared, theNorthern Div. asked for bids on corrugatedbox from three Companies.

Northern Div.(Corrugated

Box)

Thompson Div@$480

West PaperCo. @$430

Eire PapersLtd @$432



Thompson has OH & profit of 20%.

$400 ( Cost) + $80 (OH+Profit) = $480

$280(70% of 400) Material bought from Southern Div

Southern Div has Markup of 60% in $280.

Cost incurred by Southern Div. $168

Profit is $112

Erie Paper Co.

Outside liner Supplied by southern Div @$90 ( S.P.

include 60% out of pocket cost i.e. $54) Printing by Thompson Div @$30 ( Cost $25)

West Paper Co.

No Materials bought from Birch Paper Co.



Which bid should Northern Div. Should acceptand why?

Should V.P. intervene w.r.t. decision taken by

Northern division under current pricing?Would the decision remain same if southern

Div. running at full capacity?

Whether the existing divisional pricing policy

good for the company?



Thompson West Paper Erie Papers Inc.

Divisional perspective:

Cost 480.00$ 430.00$ 432.00$

Company Overall perspective:

Cost (external) 430.00$ 432.00$

Thompson variable costs 120.00$ 25.00$

(30.00)$

Southern variable costs 168.00$ 54.00$

(90.00)$

Cost to Company 288.00$ 430.00$ 391.00$



Under the current pricing policy NorthernDiv. will be bound to accept the bid of WPC@ $430. The cost to company will be $430.

The VP must intervene as the cost tocompany is lowest for Thompson Div @$288which is not reflected in the bid.

If Southern Div running at full capacity either

it will sacrifice its external sales or will haveto install extra capacity.

The existing inter divisional policy will not befare pricing as it will result in inefficiency.

MA_Birch Paper Co.

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