MANAGEMENT CONTROLLING SYSTEM

Prepared By: Afifah Fauziyyah Fauzan Adam Angelina C. Sinulingga Novelda Zulmi

BACKGROUND COMPANY

Birch Paper Company was a medium-sized, partly integrated paper company, producing white and kraft papers and paperboards. A portion of its paperboard output was converted into corrugated boxes by the Thompson division, which also printed and colored the outside surface of the boxes. Including Thompson, the company had four producing divisions and a timberland division, which supplied part of the companys pulp requirements. For several years, each division had been judged independently on the basis of its profit and return on investment. Top management had been working to gain effective result from a policy of decentralizing responsibility and authority for all decision except those relating to overall company policy. The companys top officials believed that in the past few years the concept of decentralization had been applied successfully and that the companys profits and competitive position definitely had improved.

ANALYZING THE PROBLEM

Thompson divisions Offer
Division Thompson ( in thousand units)
Thompsons expenditure Profit for Southern Division Sales price ($400 * 70%) Cost production ($ 280 * 60%) Total Cost $ 228 $ 280 ($ 168) ($ 112) $ 400

Division Thompson makes the profit markup of 20% of its total expenses to sales price being 120% x $ 400 = $ 480. Not all expenditure of division is $ 400 expense for the company as a whole because there are profits to be contained by Southern on Thompson.

West paper offer: Paper Birch expenses incurred for this offer is $ 430 per thousand units. Companies must spend money of $ 430 if you want to buy from West Paper.
Eira Papers, Ltd offer:
Eira Papers, Ltd (in thousand units)
Offer price Less : profit Southern Division $ 36 $ 432

($90*40%)
Thompson Division ( $30-$25) Total Cost $ 391 $5 ($ 41)

Eire Paper, Ltd (in thousand units) Offer price / expense Company Income $ 432

Sothern Division
Thompson Division Division expenditures Southern Division (60%*90) Thompson Division

$ 90
$ 30 ($ 120)

$ 54 $ 25 $ 79

Total Cost

$ 391

The best offer for the company as a whole is the lowest cost bid is from the Division of Thompson bid of $ 288. Although according to William Kenton division is best to offer the lowest price is $ 430 from West Paper Company. If Birch Paper Company purchased from the West for $ 430, then the company will lose if the company produces its by themselves and it cost only $ 288.

Mr. Kenton should not accept this bid because it does not benefit the company as a whole. If Birch Paper produces internally, so much does it cost only $ 288 per thousand units box. Whereas if you buy from West Paper at a price of $ 430 Paper Birch, the company will incur a loss of $ 142. But, we also do not recommend Kenton Thompson just received an offer at a price of $ 480. Kenton had to renegotiate the price of the transfer as a fair price for the transfer at market price while Thompson's bid above the market price.

Second Question

Vice president of Birch Paper must take action to establish and improve procedures and transfer pricing policies with each division or improve transfer pricing policy is not clear, although the volume of transactions is less than 5% of the volume of each division involved.

Third Question

Transfer price is a fair market price, that will be reduced costs that will not happen for the sale of such internal transport costs. This is different from the Thompson Division offers which offer 10% above market price. Northern Division Naturally be hesitant to accept the offer. Can be seen in the transfer pricing system has failed and not working properly. Division Manager Thompson charge 20% of fixed overhead costs and profit to the price transfer to the Northern Division but for the last few months, the division failed to operate to the fullest. Thompson Division should provide bid price below $ 480 due to the charge capacity and can offer cover the overhead costs. But this division even put a high price for the offer. It is caused managers who want to pursue profit for the division.

Fourth Question

Changes that we can do in the transfer pricing system Birch Paper Company
Vice President Northern Division should not be forced to accept the offer at the price of $ 480 Northern Division has information on the price of similar products outside Transfer price should be set with the consent of all the divisions and companies

CONCLUSION

Northern Division of Birch Paper Company should accept the offer of the Division of Thompson as a bid to lower costs and encourage internal purchases. In terms of transfer pricing, the Division must revise Thompson. Transfer prices that are too high cause Northern Division products will not be able to compete in the market. Transfer pricing system in the company is not working properly. Transfer price is at fair market prices.