Birch Paper Company
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Executives often react prematurely to situations that appear straightforward, and problems whose solutions seem uncomplicated. They soon discover that a superficial understanding of their company, its divisions, and its management problems can be detrimental to their long-term success. Birch Paper Company provides an excellent example of this. The company is divided into decentralized business units, each with the freedom to source from within or from the outside. In this case, the company's Northern Division has received three bids on the manufacturing of a display box, two from outsiders, West Paper Company and Eire Paper Company, and one from another Birch Paper Company division, Thompson. The management problem that arises in this situation is transfer pricing. Should Northern accept the high bid from an insider, or turn to one of the lower bids from the outside?
The solution to the case seems obvious crunch some numbers and have Northern Division take the bid that gives the company the highest overall profit. If they accept the bid from West Paper, Northern and the company pay $430. If they accept the bid from Eire Paper, Northern pays $432, but the company only pays $391 because Eire buys its outside linerboard from Birch...