Birch Paper Company Case Solutions

Case Solution – Birch Paper Company

1. From what you can discern from the case, is Mr. Brunner a good manager?  Why or why not?

In my point of Mr. Brunner isn’t a good manager due to the following points mentioned in the case

• The reason that Mr. Brunner brought to answer why he added full 20% overhead and profit charges to his out pocket cost discloses is not only unpersuasive but also discloses his management deficiency. Mr. Brunner knew from the start that the company policy allows each division to buy whatever supplier it wishes and the bid for the display boxes could end up offered to outsiders. Therefore, he should have requested an amount above the cost of its design and development work at the beginning if Thompson needed to make profits on that work instead of waiting until the next bid for the display boxes. If he did that, Northern Division wouldn’t have an option except accepting the quote of Thompson for package design and development because other companies wouldn’t do the job just cost reimbursement. Instead of reasoning that he felt entitled to a good markup because Thompson didn’t receive any profits on design and development work, he should have earned those profits on time and quoted competitive price for the production of the box later.
• Ordering salesmen of Thompson division to stop cutting the prices in their quotes and to bid full cost quotation doesn’t look to be a good decision considering the fact that the division operated under capacity at times during the past months. Instead, the company should compete in the market by producing qualitative products at competitive prices in the market. At times when the company operates below capacity due to lack of demand, the division might be better off even if it doesn’t bid full cost quotations. For instance, quoting its variable costs and some part of its overhead costs would be much better than operating below capacity and sharing fixed overhead costs over fewer jobs.
•  70% of Thompson’s out of pocket costs of $400 per thousand boxes represents cost of both liner and corrugating medium, which are supplied by Southern Division. Southern division quoted the prevailing market price although it had been running below capacity. Taking those two facts into consideration, it looks like this is the one of the main reason why Thompson is quoting a higher price. Therefore, Mr. Brunner could have tried to secure a lower price than one prevailing in the market from Southern division because southern division operated under capacity and it could receive a lower price due to that fact.

1.  Discuss why this situation has arisen at Birch?  In your answer, be sure and consider if it is a problem with the control system, a problem with the transfer pricing policy, and/or a problem with the managers of one or more of the divisions.  

• One of the main reasons for this situation is the failure of the manager of Thompson manager Mr. Brunner to gain profit in the design and development work for Northern division and his desire to make up the failure later at production.  Secondly, Mr. Brunner is trying to use policy of quoting full cost and get extra return for each of Thompson’s customer job offers including that of Northern division. As a manager he should have looked each job separately because the opportunity cost each job, which is normally added to marginal cost to get minimum transfer price, differs from time to time.  
• Another reason might be the inherent disadvantage of decentralized system, which sometimes leads to suboptimal decision making. That is caused because top management gives up control over decision making and subunit managers don’t have the necessary expertise to handle the responsibility when the company as a whole is worse off. Suboptimal decision making can also arise when managers are skilled enough to handle such situation in cases where a decision’s benefit to one subunit is more than offset by the costs to the organization as a whole. Interference of top management would be necessary but it would also disrupt the decentralized system and its advantages that include performance evaluation of individual divisions and their managers.

1. Discuss any specific changes you would recommend making in the control system and/or transfer pricing policy of Birch Paper.  If neither needs to be changed, discuss why not.  

I would recommend the following change in the control system/transfer pricing policy of Birch paper.

1.  A Transfer pricing decision board or committee should be set up which can take care of the controversial issues and can have a broader understanding of group gains.

• In our case, the excess inventory of Southern division would be utilized and operating capacity of Thompson would be maximized while the total cost of the producing the boxes would be lower if Northern division buys from Thompson. Thompson would still realize a profit even if it lowers down its price at west paper offer of $430 and Southern division could also lower down its prices of linerboards for Thompson because it is operating below capacity. The transfer pricing committee would set up a transfer pricing policies that can accommodate various situations and solve controversial issues. Adoption of such system by the designated committee would address all those concerns at the same time and ensure that the company would ultimately realize its goal of maximizing profits.  That way each division’s target to maximize profit in decentralized set up would no longer make the company sacrifice its overall goal.