case 62 Birch Paper Company “APT wore to price these boxes any lower than $460 a thousand, sid James Bronnen manager of Birch Paper Companys Thompoon Division, Td be ‘cuntermanding my order of lest month fer our salesmen to top shaving thee bi and to bid fllcort quotations, Tve ben trying for wecks bo improve che ] quality o ur busines, and Ttura around naw and acept this ob at $430 oF $480 or something less than $480, Te touring down this program I've boon Working so hard to build up. Tho division cant very well thow a profit by Putting ln bids that dont oven cover a fair share f overhead! cost, let alone ; ‘Bre ure profit” ‘Birch Paper Company wes « medium-sized, pally integrated paper com- ‘pany, producing white and Kraft papers and paperboard. A portion ofits Daporbosrd output was converted into eorragetod boxos by the Thompeon Division, which also printed and colared the outside surface of tho boxe Including Thompson, the company had four producing divisions anda timber. lund aiision, which tapped pare the company’s pulp requirements, or several years, each division had boen judged lndependenty on the bas of its proft and retum on investment. Top management hed been working to gain effective rents from s policy of decentralizing responsiblity and suthority for ll decisions except those relting to overall company pli The ‘companys top ofits beloved that inthe past few years the concept of de ‘ratralzation had boen applied succasflly and thatthe company’s profits {apd compoticivepoition defiitely hed irsproved. ‘The Northora Division had designed a special deplay box for one ofits papers in conjencion withthe Thompeon Division, which wes equipped to ‘make the box. Thompson's stato package design and development spent Sov. feral months perfecting the design, production methods, znd materials tobe ‘sed: Because f the unusual eslor and shape, these were far fem standard, | ‘According ton agrecment between the to divisions, the Thompson Divison i was reimbursed bythe Northern Division forthe coe oft design and devel i pment work ‘When all de speciation ware prepared, the Northern Division asked for ‘ds on the bor from the Thompron Division and fom fe outside companite i Each division manager was normally free to buy trom whetever supplier he I ‘wished, and even on sles within the company, divisions were expected tomect_ ! the going market price i they wanted the businese i ‘Dring thls prod, che profit margin of sch converters a the Thompson Division wore boing squeezed. Thompson, ax did many other sinilar conver: rs, bough its peperbeard anit uncion wns to print, ext and shape ito i ‘bores. Though it bought most ots materials from other Birch divisions, mast i ‘of Thompsoa's sles were made to outside customers. If Thompeon got the i larder from Norther, it probably would buy is linerioged end corregnting ‘medium from the Southern Divison of Bitch. The wall of «corrugated tor i ‘Tiscali ah nessun Nl a Hand Bases r se an ows Menor alge nar Set SeeContr anti Pci 245 ‘coast f outside and inside sheets of inerboard sandwiching the Sted sorru- tating medium, About 70 percent of Thompeo's out-of pocket cost of $400 fr fhe order rerecented the cst linerboard and corogatng edi. Though Southern had been runningbeow capacity and hed excne inventory it quoted ‘the market price, which had not naticeably weakened asa result ofthe ore fuppls Its oxt-spacket costs on both liner and eorrugeting median ore about 60 perent of the calling prise, ‘The Northern Division rected bids on the botes of $480 a thousand from the Thompson Division, $450 a thoasand from West Paper Compeny. end $422 ‘8 thousand from Eire Papers, Lid. Eire Papers fered to boy from Birch the Sutsdeinerboerd with the special printing already on but would supply te (Wm insde liner end eorragaing medium. The outside liner would be repped by tho Southern Division ata price equivalent of 00 thovtend boxes, and:t ‘would be printed for $30 a thousand by the Thompson Division. OF the $9, bout $25 would be cut-oF pocket cots, ‘Sine this situation appeared tobe a lito wnusus, Wiliam Keaton, max ager of the Northern Divison, ditcusred the wide discrepancy of bids with ‘Bsc commercal vice president He ld tho vice president: “We cll ina very ompeditive market, whore higher costs cannat be peed on. How can we be txpercd tao a decent profit and return on investment if we have to buy ‘ur supplies at more than 20 percent over the going market?" ‘Knowing chat Me, Brunner on ecasion nthe pa few months had been uo able to oprate the Thompeon Division at capacity it seemed ed to the vee President that Mr. Brunner would add the full 0 pereant overhead and prof ‘hange this out pocka ast. Whon he was ake about tis, Me Brunner s fiver asthe statement that appears atthe beginning ofthe case, He wert tn to way that having done the developmental work on tho box, and having r= feived no prof on Ut he felt entitled vo good markup onthe production the box ite "The vcs president explored further the cost structures of the various dv slong He remembered comment thatthe controller hed made at amesting te ‘wealcbefore tothe effect thet cots which were variable fer one divs could be largely fixed fr the company asa whol. He knew that in the absence of specie trders from top management Nr. Kenton would asept the lowest bd whic ‘was that ofthe West Paper Company fr $490, However, it would be possible fer top management to order the sceptance of ansther bi if the sitaticn war ‘anted such action. And thoagh the volame represented by the transactions ‘ueston was less than & percent ofthe volume ofan ofthe divisions involved, ther transactions would conceivably rae snular problems later, Questions Which bid should Northern Division accept that i inthe best interests ef ‘Birch Paper Company? Should Mr. Kenton acept this bid? Why o why not? Should the viee president of Birch Paper Company take any action? In the controversy described, how fat al, isthe ranafer pice system d+ functional? Does tis problem call or gone change, or change, inthe tran fer pricing policy ofthe overall frm? If 0, wht specif changes do you suggest?