Birch Paper Co. - Case Solution

Synopsis - Birch Paper Company

Birch Paper Company is a medium-sized, partly integrated paper company that is comprised of four production divisions and a timberland division.

Each division is an “investment responsibility center,” and the company has observed improved profits and competitive position since the move to decentralize in the last few years.

The company would like to keep the decentralized structure in place but is now observing the conflict between its divisions with regard to transfer pricing.

One such example is the issue that has happened between the Thompson division and the Northern division.

While Thompson is able to produce a new display box for Northern and has excess capacity, its bid for price per thousand boxes produced is significantly higher (10%) than the bids from 2 outside competitors. Adding to the conflict was Thompson’s participation in the design and development of the display box.

The Company’s upper management is lacking a transfer pricing policy that enables goal congruence amongst the divisions.

The following report will evaluate different types of policies and will make a recommendation as to the most effective for Birch Paper Company.

Key Issues

1. No evidence of goal congruence amongst divisions.
2. The transfer pricing policy of the company is lacking.
3. Upper management would show contradictory behavior by decentralizing the company while trying to influence and favor business interactions between divisions. This behavior sends conflicting messages to the divisions and could lead to disruptions and confusion.
4. The Thompson Division has put a bid price that is higher than the bids from the 2 competitors.

Root Cause of Key Issues

1. Birch Paper Company lacks a fair and equitable transfer pricing policy where incentives are possible for the supplying division and buying division.
2. The move to decentralize the Company and set up the divisions as “investment responsibility centers” was done only a few years ago. The Company is still learning how to best manage...