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Birch Paper - What is Brunnerís complaint? Free essay! Download now

Home > A Level > Business studies > Birch Paper - What is Brunnerís complaint?

Birch Paper - What is Brunnerís complaint?

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Downloads to date: N/A | Words: 712 | Submitted: 12-Nov-2011
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Birch Paper


Birch Paper

What is Brunnerís complaint?
A price of lower than $480 per thousand boxes, which does not even cover a fair share of overhead costs, makes it difficult for the Thompson Division (ďThompsonĒ) to show a profit.

Does this transaction have a history?
Yes. The company policy allows each divisional manager full freedom and discretion to buy from anywhere. Each division has been judged independently on the basis of its profit and ROI for several years. Early in 2002, the Northern Division designed a special display box in conjunction with Thompson. Thompson was reimbursed by the Northern Division for the cost of its design and development work.

What kinds of costs would the Thompson division have incurred when designing the specialty box?
Thompson will incur costs such as labor, material costs, depreciation, managerial overhead, utilities and rental costs.

Variable costs
Direct labor (salary for R&D staff)
Direct materials

Fixed costs
Salary for administrative staff
Rental costs

What kind of transfer pricing policy does Birch use? Does this make sense for them? Why or why not?
Birch is using a market-based transfer pricing policy. In terms of conditions consistent with market-based transfer pricing policy, this policy makes sense for the company. An external market exists; apart from Thompson, the Northern Division can also procure boxes from outside vendors, such as West Paper Company and Eire Papers, Ltd.. In addition, each division is judged independently on the basis of its profit and return on investment. Finally, most of Thompsonís sales are made to external entities.

Create a diagram that illustrates the relationships among the Birch divisions and external companies. Add the cost flows to your diagram to help you answer the next question.

? Thompson procures linerboard and corrugating medium from the Southern Division.
? Thompson sells corrugating boxes of which the surface is printed and colored to the Northern Division.
?The Northern Division can instead buy the same boxes from West Paper Company, an external vendor that offers a lower price than Thompson.
?The Northern Division can purchase the boxes from another outsider named Erie Papers, Ltd., which also charges less than Thompson. Different from West Paper Company, Erie Papers, Ltd. offers to buy the outsider linerboard with the special printing from Birch; the outside liner will be supplied by the Southern Division (?), and will be printed by Thompson (?).

Calculate the net (or out of pocket) cost of accepting the West, Eire, and Thompson bids.
Net cost (per thousand)

Purchase price

Minus: CM from the sale of printed outside linerboard - Southern
CM from the sale of printed outside linerboard - Thompson
Net cost (per thousand)

Cost of linerboard and corrugating medium
Remaining out-of-pocket cost
Net cost (per thousand)

What would you recommend?
Accept the bids from Thompson.
The net cost analysis indicates that, despite the lowest price, it is not in the best interest of ...

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