Bid PRice Cost to Variable Cost

Northern
Division
Thompson 400+(400*20%) 400 (20% Overhead &
Division =480 profit)
400*70%=280 70% of variable
cost: line board and
corrugated items
280*60%=168 60% is variable cost
for Southern
division
120 30% of remaining
variable cost
168+120=288 (480-288=192 profit to Birch
company)
Eire Papers 432 30-25=5 For printing (25
Ltd. variable cost)
90-54=36 For line board items
(60% variable cost)
432-41=391 (5+36=41 profit to Birch Company)
West Paper 430 430 No Profit
Company

Since the company is focused on ROI & profit of each division, without considering the
profit of the company as a whole, the commercial vice-president may intervene in the
following manner:
Since the volume is only 5% of total production volume, the vice-president may not
interfere here, otherwise it may create breach of trust among divisions. However, the
vice-president may come up with some pricing policy changes.
For Internal selling: There is a need for modification in the transfer pricing policy, so that
the end product would meet the market price and the overall profit may be divided
among the three divisions based on some proportion, mutually agreed by other
divisions.
For External Selling: For external selling, each division should be free to sell their
products.
Conclusion: Company should not focus only on individual divisions/sectors making profit
but on overall performance of the company.