Birch Paper Co Case Solution

1. Which bid should Northern Division accept that is in the best interests of Birch Paper Company?

Northern Division asked for Bids from on the box from one of the four Birch Paper Company’s division, Thompson Division, and two outside companies. The three different bids received by Northern Division are:

• $480 a thousand from Thompson Division.

• $430 a thousand from West Paper Company,

• $432 a thousand from Eire Papers, Ltd.

These bids show the cost Northern Division will have to incur for purchasing boxes. It is obvious that Northern Division will go for the lowest bid in order to minimize the cost. But the decision will be different when the interest of Birch Paper Company is kept ahead of the interest of Northern Division. These bids will have to be evaluated on the basis of the cost to the company instead of cost to the division.

The table clearly shows the cost of boxes to the division and the cost to the company. If the bids are evaluated on the basis of company’s overall perspective, it is recommended that Northern Division should accept the bid from Thompson Division. As shown in the table, cost to the company if the boxes are manufactured in Thompson division will be minimized. Hence, accepting Thompson’s bid will be in the best interest for Birch Paper Company.

2. Should Mr. Kenton accept this bid? Why or why not?

For Mr. Kenton, manager of Northern Division, profitability for the division are more valuable than the profitability of the company. Moreover, each division of the company has been judged on the basis of its profit and its return on investment, which encourages manager to maximize the profit of its division. Furthermore, the policy of decentralization had been applied across the company which gives managers power to take actions that are best interest for their divisions. On the basis of the above discussion, it is recommended that Mr. Kenton should accept the $430 bid from West Paper Company. This is the lowest bid received by the division; hence, it will minimize the cost and maximize the profit for the division. Although, bid from Thompson will be most cost effective for the company as a whole, from the division’s perspective it is in the least interest for the division to accept this bid. Hence, Mr. Kenton should not accept the bid from Thompson division and reduce its profitability.

3. Should the vice president of Birch Paper Company take any action?

The wide discrepancy of bids has caused a problem that can be solved by sacrificing the interest of either company or Northern Division. This dilemma requires reflection by the vice president of Birch Paper Company; otherwise, Mr. Kenton will go for the lowest bid, which was given by West Paper. However, this question whether the vice president should take an action or not does not have a straight forward answer. There are arguments supporting both the sides, either vice president should go for any action or let Mr. Kenton decides on the basis of divisional interest.

If the vice president decided to get involved in the bidding process, then the company will be undermining the policy of decentralizing responsibility. As per the policy of the company, each divisional manager is free to buy from any supplier, and even sales within the company. Therefore, involvement of vice president in bidding decision will weaken the sovereignty of each divisional manager; hence, it can be recommended that no action must be taken by the vice president. Another argument that supports the argument of no intervention is that the negative financial results will not be significant if no actions are taken. As stated in case, “the volume involved in the transactions is less than five percent of volume of the division involved”. Therefore, this insignificant nature of the volumes of transaction supports no intervention by the vice president.

On the other hand, if the vice president does not intervene in the decision related to bidding the company will have to forgo the cost savings associated with accepting the bid from Thompson division. As mentioned, it is least interest for Northern division to accept the bid from Thompson as it is the highest bid which will minimize the divisional profits. However, this bid saves cost for the Birch Paper Company.