Mr. Kenton should accept Bid # 2 – West Paper Company at $ 430 as it was the lowest command and therefore will give Northern Division the highest return. Under the current company policy each division is judged independently based on net income and return. therefore Mr. Kenton would merely be interested in his ain division’s success and non the overall success of the company.
In order to make up one’s mind which command is in the best involvement of Birch Paper Company we need to analyze each command individually:
Bid # 1: Thompson Division – $ 480
* Thompson Division’s cost = $ 400
* Purchasing line drive and corrugating medium from Southern Division: $ 400*70 % = $ 280
* Therefore. other costs would be: $ 400- $ 280 = $ 120
* Southern Division’s cost = $ 280*60 % = $ 168
* Total cost to the Birch Paper Company: $ 168+ $ 120 = $ 288 Bid # 2: West Paper Company – $ 430
* Total cost to the Birch Paper Company: $ 430
Bid # 3: Ireland Company – $ 432
* Selling monetary value of Thompson = $ 30
* Thompson Division’s cost = $ 25
* Thompson Division’s net income = $ 30- $ 25 = $ 5
* Selling monetary value of Southern Division = $ 90
* Southern Division’s cost = $ 90*60 % = $ 54
* Southern Division’s net income = $ 90- $ 54 = $ 36
* Total cost to the Birch Paper Company = $ 432- $ 36- $ 5 = $ 391
Answer: Bid # 1 – Thompson Division is in the best involvement to the Birch Paper Company as it has the lowest entire costs therefore bring forthing the highest overall grosss for the company. However. this reply does non reflect what would be in the best involvement of the Northern Division as they would have much lower net income borders from accepting the higher command. Birch Paper Company is gaining most of their net incomes in the Southern Division which has a 66. 7 % markup ( $ 280- $ 168= $ 122 or 66. 7 % markup ) and the Thompson Division which has a 20 % grade up ( $ 480- $ 400= $ 80 or 20 % ) and non needfully the Northern Division which would non be able to sell the merchandise at any important grade up due to the transference of costs from the other companies. The instance states “on inter-company gross revenues. divisions selling to other divisions were expected to run into the traveling market monetary value. ” Obviously. Southern division didn’t use market-based transportation monetary values which gave rise to its inefficiency and so resulted in an unevenly spread net income over the three divisions.
We believe that the Vice-President should step in as Birch Paper Company has a figure of issues in its current pricing theoretical account that are apparent in the instance: * Thompson Division is warranting its 20 % grade up for counterbalancing work which went into the design elements of the boxes. However. Thompson Division was antecedently compensated for this work from Northern. therefore this is a sunk cost and should non be factored into their offer. * There is besides an issue that Southern Division is over pricing their stuffs to Thompson Division. Although Southern Division is presently running below capacity and has excess stock list they still quoted Thompson utilizing a 66. 7 % grade up. Looking at this from the Company degree. in order for Southern Division to go more efficient they should diminish this grade up to assist increase gross revenues which would raise capacity and diminish the extra stock list. This in bend would assist portion the net income border with Thompson Division and Northern Division. * By measuring the overall costs to the company. Bid # 1 from Thompson has a entire cost to the company of $ 288 while their command is at $ 480. which is a sum of 66 % markup. Birch Paper Company should hold the ability to fit this lower offer of $ 430 ( which would still be a 50 % markup ) and scatter the cost borders more every bit throughout the Southern Division. Thompson Division and Northern Division. Action: The VP should step in in the current dealing by take downing the command offer to $ 430 to reflect the traveling market value of the composition board. He so needs to diminish the borders that Southern and Thompson are utilizing for the current dealing so that all three divisions involved are doing a sensible return. Each division might utilize cost-based transportation monetary values ( supply stuff or service to other divisions at its existent cost ) . The net income earned by the terminal division ( Northern division in this instance ) will so be every bit distributed to each throughout the value concatenation. As a consequence. each division would hold inducements to command its ain cost and hence function the best involvement of the company as a whole. In this manner. the involvement conflicts among divisions would be diminished every bit good. However this would merely turn to the current instance. As future minutess could conceivably raise the similar jobs. and these jobs root in that the four divisions are excessively independent. the ordinance about internal minutess should be formulated. The VP should run into with upper direction and discourse the issues apparent with the current pricing theoretical account. There should be more consistence between divisions as to what are fixed and variable costs. This would turn to future issues similar to Thompson Division counterbalancing for design elements in their borders. Additionally. the Birch Paper Company should re-visit the company’s rating theoretical account so that the divisions are motivated to non merely increase single net incomes and returns but are besides motivated to increase parts that would increase the overall net incomes of the Birch Paper Company. In decision. by doing the above suggested alterations. Birch Paper Company would be able to take advantage of its lower cost. administer net incomes more equally throughout the divisions of its company and be more competitory in the market topographic point. Although the current dealing merely represent less than 5 % of the volume of any division. by step ining the VP will see that Birch Paper Company are non loosing future commands due to jobs associated with their current pricing theoretical account.