CASE STUDY

The Birch Paper Company is a mid sized

company producing white and craft papers
and Paperboard.
The company has four production Division
and a timberland division.
Each unit of the company is judged
independently on the basis of its profit & ROI
Company follows concept of decentralization
and believes that it has improved the
performance.
Birch
Paper Co.
Northern
Div.
Southern
Div.
Thompson
Div.
Div. 4
Timberland
Div
Northern Div Designed special display box for
one of its papers in conjunction with
Northern Div.
Thompsons staff spend months in perfecting
the design, production and methods and
materials to be used.
Paper box had unusual color and shape from
standard.
Northern Div. reimbursed the cost of design
and development work to Thompson Div.
The specification of the box all prepared, the
Northern Div. asked for bids on corrugated
box from three Companies.

Northern Div.
(Corrugated
Box)
Thompson Div
@$480
West Paper
Co. @$430
Eire Papers
Ltd @$432
Thompson has OH & profit of 20%.
$400 ( Cost) + $80 (OH+Profit) = $480
$280(70% of 400) Material bought from Southern Div
Southern Div has Markup of 60% in $280.
Cost incurred by Southern Div. $168
Profit is $112
Erie Paper Co.
Outside liner Supplied by southern Div @$90 ( S.P.
include 60% out of pocket cost i.e. $54)
Printing by Thompson Div @$30 ( Cost $25)
West Paper Co.
No Materials bought from Birch Paper Co.

Which bid should Northern Div. Should accept
and why?
Should V.P. intervene w.r.t. decision taken by
Northern division under current pricing?
Would the decision remain same if southern
Div. running at full capacity?
Whether the existing divisional pricing policy
good for the company?


Thompson West Paper Erie Papers Inc.
Divisional perspective:
Cost 480.00 $ 430.00 $ 432.00 $
Company Overall perspective:
Cost (external) 430.00 $ 432.00 $
Thompson variable costs 120.00 $ 25.00 $
(30.00) $
Southern variable costs 168.00 $ 54.00 $
(90.00) $
Cost to Company 288.00 $ 430.00 $ 391.00 $
Under the current pricing policy Northern
Div. will be bound to accept the bid of WPC
@ $430. The cost to company will be $430.
The VP must intervene as the cost to
company is lowest for Thompson Div @$288
which is not reflected in the bid.
If Southern Div running at full capacity either
it will sacrifice its external sales or will have
to install extra capacity.
The existing inter divisional policy will not be
fare pricing as it will result in inefficiency.