1. Which bid should Mr. Kenton accept?
Mr. Kenton should accept the low bid of the West Paper Company at $430 per thousand. He has an obligation to make the best business decisions for his division, which means taking the lowest legitimate and reasonable bid. By accepting the West bid, the division will save 10.4% compared to the bid of the Thompson division. If the Thompson bid were within a few dollars of the low bid, as the one from Eire Paper, it would be more reasonable to accept the bid.
Also, it is at least nominally the policy of the Birch Company to accept the lowest bid, since the vice president knows the Kenton will accept the lowest bid barring any outside intervention. It is also the policy of the company to expect that inter-division bids meet the going market rate. By rejecting the Thompson division bid, Mr. Kenton shows Mr. ...view middle of the document...
Similarly, the Northern Division cannot afford to carry the cost burden of the mark up into sales. Mr. Kenton stated, “We sell in a very competitive market, where higher costs cannot be passed on.” Furthermore, the time, effort, and resources spent on box design by Northern Division has already been compensated (as stated on page 1). This voids Mr. Brunner’s claim that the markup was reasonable because of the development work (page 2).
The best interest of the company would be to buy the lowest bid and then assess production and cost efficiencies in the Thompson Division. The price point of $480 per thousand is much too high to be seen as reasonable and also contradicts the company’s policy of market price selling between divisions.
3. Should the commercial vice-president intervene? If so, how?
The vice-president should intervene because accepting the lowest bid from an outside company will hurt the recent years efforts enforcing the decentralization policy. In addition, inter-company sales were expected to match the current market price. The bid for the cost of materials that Thompson got from Southern was consistent with the market price; therefore, the bid that Thompson presented to Northern had a considerable markup compared to the current market price. Although Mr. Brunner claimed that the markup was compensation for his design work, the vice president should intervene to examine other costs that could contribute to this markup. He should examine the extent to which Thompson’s division costs are made up of the variable division costs versus the fixed company costs. It is possible that some of these costs are traceable costs for Thompson that should be common costs for the company. In that case, Thompson would be relieved of some of their costs and therefore be able to lower their bid. If the bid is lowered, there may be an opportunity for negotiated transfer pricing on the bid which would further support the decentralization of the divisions.