Birch Paper

764 WordsNov 12, 20114 Pages
Birch Paper 1. What is Brunner’s complaint? A price of lower than $480 per thousand boxes, which does not even cover a fair share of overhead costs, makes it difficult for the Thompson Division (“Thompson”) to show a profit. 2. Does this transaction have a history? Yes. The company policy allows each divisional manager full freedom and discretion to buy from anywhere. Each division has been judged independently on the basis of its profit and ROI for several years. Early in 2002, the Northern Division designed a special display box in conjunction with Thompson. Thompson was reimbursed by the Northern Division for the cost of its design and development work. 3. What kinds of costs would the Thompson division have incurred when designing the specialty box? Thompson will incur costs such as labor, material costs, depreciation, managerial overhead, utilities and rental costs. Variable costs * Direct labor (salary for R&D staff) * Direct materials * Utilities Fixed costs * Depreciation * Salary for administrative staff * Rental costs 4. What kind of transfer pricing policy does Birch use? Does this make sense for them? Why or why not? Birch is using a market-based transfer pricing policy. In terms of conditions consistent with market-based transfer pricing policy, this policy makes sense for the company. An external market exists; apart from Thompson, the Northern Division can also procure boxes from outside vendors, such as West Paper Company and Eire Papers, Ltd.. In addition, each division is judged independently on the basis of its profit and return on investment. Finally, most of Thompson’s sales are made to external entities. 5. Create a diagram that illustrates the relationships among the Birch divisions and external companies. Add the cost flows to your diagram to help you answer the next

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