To: Commercial Vice President
Birch Paper Company
Although the current financial implications for Birch Paper Company are not substantial, as the contract in question is less than 5% of the volume in any division, it is imperative that Birch Company establishes and addresses its transfer price policies and procedures with each division. This will ensure that the divisions are not putting their objectives ahead of the Company's and as a result, not maximizing the overall revenues and profits of Birch Paper Company. This report will highlight the issues while providing a complete analysis and recommendation for you to consider.
In examining the information provided by Birch Paper Company (BPC) it became apparent that due to the decentralized manner in which BPC operates its four production divisions, the overall maximization of profits for BPC could be jeopardized if policies and procedures are not immediately established for setting transfer prices between divisions.
Although, the decentralization of BPC's divisions certainly have proved successful in the past, it is critical for BPC to establish more concise guidelines to ensure that all the decisions that are made by each division are goal congruent and maximizing BPC's profits.
The transfer price issue has come to your attention as a result of the Northern Division's request for bids on corrugated boxes from the Thompson Division and from two outside companies, West Paper Company and Eire Papers Limited. Because each Birch Division manager is encouraged to go with the most cost effective supplier, Mr. Kenton was troubled, as he did not find the current internal transfer price competitive, as the offer was 10% over the going market rate. As a result of the current dysfunctional transfer pricing policy, the division would undoubtedly go with an external supplier, even though it may not be in the best interest...