1. For each of the three alternatives, diagram the potential cost flows, per thousand boxes, among all of the parties in the case: Southern Division, Thompson Division, Northern Division, Erie Papers Ltd, and West Paper Company.
2. Which bid should be accepted? Justify your answer.
Ans: James Brunner decides the transfer price after being given the operational control of Thompson division, and so, Kenton should accept the bid of the Thompson Division (TD). As shown in the calculations below, Northern should accept the bid from Thompson division as it has the lowest cost. Incurring the lowest costs would also enable Birch Paper Company to earn the highest profits possible.
West Paper Company
Variable cost to Northern Division of sourcing the boxes from West Paper $ 430.00
TD’s variable costs excluding transfer price $ 120.00
Variable Cost of Southern Division (Transfer Price) $ 168.00
TOTAL VARIABLE COST: $ 288.00
Eire Papers,Ltd. Variable cost incurred by Northern Division in sourcing box from Eire $ 432.00
Net Profit incurred by Southern Div by providing materials for Eire $ (36.00)
Net Profit incurred by TD by printing for Eire $ (5.00)
TOTAL VARIABLE COST: $ 391.00
3. Which alternative is in the best interests of Birch Paper Company as a whole? Provide the appropriate analyses to support your answer.
Ans: The best alternative for Birch Paper Co. would be to go with Thompson Division since it represents the lowest cost for Birch Paper. As can be seen from the calculations above, it is the most profitable option.
4. Discuss the alternatives from the perspective of the managers of the Southern, Thompson, and Northern divisions. Which alternative is best for each division? Do you think a compromise can be reached across the three divisions? Explain whether or not you think each division would be willing to accept a compromise.
Ans: Managers should be in a position to stick by their divisions while knowing what is best for their organization. They should be able to in-source or go for other options based on the cost effectiveness. But going by porter’s model, these ‘other options’ are competitors to their own division. So, Birch Paper Company should select its own division instead of going for competitors. This is because buying within the company ensures cash flow remains within the organization. 5. Should the commercial vice president intervene? If so, how? If not, why not?
Ans: Whether or not the VP intervenes is ambiguous since it has its own pros and cons. If the VP does get involved in the bidding process, he may end up undermining the autonomy of the division managers and if he doesn’t, he may lose the money saved by sourcing to Thompson. A VP need not involve himself in a situation where ‘the volume represented by the transaction in question was less than five percent of the volume of any of the divisions involved’. But, we