Case study on birch paper company with regard to transfer pricing.
AA312
Case: Birch Paper Company
1. Calculating all three options based on costs
Thompson DivisionCosts
Linearboard and corrugating medium 168(70%*400)*60%
30% of out of pocket costs 120(30%*400)
Total 288
West PapersCosts
Total 430
Eire PapersCosts
Outside linear(Southern div) 54(60%*90)
Printing(Thompson div) 25
Own Supplies 312(432-5-36)
Total 391
As shown in the calculations above, Northern should accept the bid from Thompson division as it has the lowest cost if all transfer prices within the company were calculated at costs. Incurring the lowest …
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…profits.
Hence, the company should not just assess each division based solely on financial figures like profit and return on investment. The company should assess them based on other non-financial things like quality so as to divert the division's emphasis on profits. In addition, the company should allow the divisions concerned to negotiate between themselves as they are the ones closest to the situation, rather than just asking the divisions to meet the market price.
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