Bids Per thousand units Thompson $480.00 West Paper Company $430.00 Eire Papers Ltd $432.00
Thompson Division Costs
Total out-of-pocket Cost $400.00 Cost of linerboard & Corrugated medium $280.00 Overhead & Profit charge $80.00
Southern Division Selling price $280.00
Cost of Liner & corrugating medium for Southern
Division $168.00 Profit for Southern Division $112.00 Total Profit $192.00 Total cost $288.00
Eire Papers Ltd Offer
Outside Liner Board price (from Southern division) $90.00 Cost for Southern Division $54.00 Profit for Southern Division $36.00 Printing price (from Thompson) $30.00 Out-of-pocket Cost for printing for Thompson $25.00 Profit for Thompson $5.00 Cost of supplies from Eire Papers Ltd. $391.00 Total Cost $470.00
West Paper Company $430.00
Selection of Thompson Bid is in best interests of Birch Paper Company
Q>2 Acceptance of Bid by Mr Kenton
Mr Kenton might accept the lowest bid from West Paper Company for divisional profits & ROI but it is not in best interests of the Birch paper Company. Thompson bid offers lowest cost & encourages buying within the company
Q>3 Action by Vice-President
If top management does not take any action then Mr Kenton might accept the lowest bid since transfer policy allows him to select any source.
Q>4 Transfer Price System
Transfer price system is dysfunctional since it encourages focus only on individual divisional profits and return for investment. The individual division performance goals should be aligned to organisation level objectives & profitability