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AA312 Case Birch Paper Company 1 Calculating all three options based on costs Thompson DivisionCosts Linearboard and corrugating medium 1687040060 30 of out of pocket costs 12030400 Total 288 West PapersCosts Total 430 Eire PapersCosts Outside linearSouthern div 546090 PrintingThompson div 25 Own Supplies 312432-5-36 Total 391 As shown in the calculations above Northern should accept the bid from Thompson division as it has the lowest cost if all transfer prices within the company were calculated at costs Incurring the lowest costs would also enable Birch Paper Company to earn the highest profits possible 2 As alternatives for sourcing exists Mr Kenton should be permitted to choose the alternative that is in Northern divisions own interests The transfer price policy gives him the right to deal with either insiders or outsiders at his discretion If he is unable to get a satisfactory price from the inside source which is Thompson division he is free to buy from outside Mr Kenton manager of the Northern division should not accept the bid from Thompson division The three bids from Thompson division West Paper Company and Eire Paper Company are 480 430 and 432 respectively Accepting the bid from Thompson division would be accepting the highest bid amongst all three offers highest costs This would result in the lowest profits As the Northern division is evaluated as an investment center it is judged independently on the basis of its profit and return on investment Mr Kenton should not accept the bid from Thompson division 3 The method of using transfer price to decide whether to in source is optimum if the selling profit center can sell all of its products to either insiders or outsiders and if buying center can obtain all of its requirements from either outside or insiders The market price then represents the opportunity costs to the seller of selling the
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