Solution case Birch Paper company

Questions Birch Paper Company

1) What bid should the Northern Division accept?
The bid the Northern Division will accept is the bid of the Wester Paper
company.
This is the lowest bid so this is the best for the Nothern Division.
The profit of the Nothern Division will be the highest by choosing this bid.
Each division will be judge independently on their profit and return on
investment.
So the goal of the division is to have their divisional profit as high as
possible.
If the Nothern Division accept another bid than that of the Wester Paper
company their divisional profit will be smaller.
Besides this, each division manager is free to choose from which supplier
he wants to buy, so the division manager of the Nothern Division will
choose to buy from the Wester Paper company.
2) What bid is in the best interest of the Birch paper Company?
The bid which is in the best interest of the Birch Paper Company is the bid
of the Thompson division.
The costs of the Birch Paper Company will be the lowest by accepting the
bid of the Thompson division. Every costs are per thousand boxes and in
dollars.
- Costs if accepting the bid of West Paper company: 430
- Costs if accepting the bid of Eire Papers:
The bid of Eire Papers is 432.
Eire Papers will buy from Birch Company the outside linerboard.
Eire Papers buy the outside liner from the Southern Division for a price of
90. The out of pocket costs from the Southern division are 60% of its
selling price, so 90 * 0,6 = 54. The profits for the Southern division are 90
54 = 36.
Eire Papers will printed the outside liner by the Thompson division and pay
30 for this. Of this 30, 25 are out of pocket costs. So the profit for the
Thompson division will be 5.
Costs bid Eire Papers: 432 + out of pocket costs divisions 79 (54 + 25) =
511
Less the price which Eire Papers pay to Thompson division and Southern
division 120 (90 + 30).
Costs for the Birch company if accepting the Eire Papers bid is 511 120 =
391.
There also other ways to calculate the costs for the Birch company if
accepting the Eire Papers bid, for example the costs of the bid of Eire
Papers (432) less the profits of the Thompson and Southern division, which
is 41 (5 + 36), 432 -41 = 391.
-Costs if accepting the bid of Thompson division.
The costs will be the out of pocket costs for both liner and corrugating

medium.
Out of pocket costs Southern division of Birch (where Thompson division
buy its linerboard and corrugating medium) : 400 * 70% * 60 * = 168.
Out of pocket costs Thompson division 400 (400*70%) = 120.
So the costs for the Birch company if accepting the bid of Thompson are
288 (168 + 120).
The costs for the Birch company are the lowest by accepting the bid of
Thompson.
Besides the lowest costs, there are more reasons why choosing the bid of
the Thompson division is in the best interest of the company.
That is because early in 2002 the Northern division designed a special
display box in conjunction with the Thompson division and the Thompson
division already spent a lot of time in making the box. If the Thompson
division isnt able to sell the box, there is a lot of time and money waste.
Besides this, the Southern division had been running below capacity, had
excess inventory and the Thompson division was also unable to operate at
capacity, so it is efficient to use this inventory for making the box, so there
is less under capacity in the Birch company.
So it is in the best of the Birch company to choose for the bid of the
Thompson division.
3) Should the vice-president intervene?
On the one hand, the vice president shouldnt intervene. The top officials
believed that in the past few years the concept of decentralization had
been successfully applied and companys profits and competitive position
had improved. So if the vice president intervene this will distort the
concept of decentralization. Besides this, the volume of the transactions
was less than 5% of the volume of any of the divisions involved, so this a
small volume.
But on the other hand, if the vice president doesnt intervene the Northern
division will choose for the bid of the West Paper company, because at this
bid the costs for the Northern division are the lowest and the managers of
the divisions are free to choose form which supplier they want to buy and
the division will be judged by their own profit. Choosing the West Paper bid
is not the optimal bid for the Birch company. Future transactions could
receive similar problems, so it is necessary for the vice president to
intervene now, to prevent future problems and costs of choosing the
wrong bid.
It is possible for top management to order the acceptance of another bid
and in this case the vice president should do this and choose for the bid of
the Thompson division.