Northwestern

6.Australian Transaction – analyze the opportunity for Northwestern in terms of the best interests of the company and the ability to the parent, Korea and Indonesia to provide the most competitive response.

Northwestern is risky to win the bids. Because the parent set the guidelines that subsidiaries need to buy raw pulp from parents. The price that subsidiaries taken from the parents is $450/ton. It is not the competitive costs for subsidiaries. Since each subsidiary has their own revenue expectation, it is hard to satisfy their expectation under the high costs. There are two ways for them to solve the problems. First is that parent reduces the sales price. The main goal for the parent is to reduce the inventory. Less sales price can win more contract to realize the goal. At the same time, the subsidiaries are more likely to win the contract.  The other is that subsidiaries use other suppliers’ raw pulp. But it will influence the guides of the parents and influence the

7.Transfer Pricing Analysis – examine the guidelines established by the parent in the transfer pricing program. Analyze their effect and efficiency on American, Korean and Indonesian profit centers. Suggest alternatives or modifications which may have been superior to the established system. Explain the basis for your suggestions.

Transfer prices between subsidiaries were set at average sales price. Each of subsidiaries was assigned a certain amount of pulp. The sale of the pulp allocated to the subsidiary will be the evaluation of their financial performance. The mill income from subsidiaries was calculated by taking the sales price less the direct cost and freight charges incurred by the mill. So in 1994, average Northwestern U.S. mill shipped at a price of $450/ton and had a direct cost of $280/ton, which provided a contribution margin of $170/ton at the U.S. mill. Freight costs to South Korea and Indonesia were $60/ton and$70/ton. So the total profit for the parent is about $100. This transfer pricing program can help the parent reduce the inventory and decrease the fixed costs and parents can have fixed revenue.

However, great pressure was pushed on Korean and Indonesian profit centers. The price from the parent is higher than other providers. Potential high cost increases the risk of bid. Higher bid price will influence the contract result when competed with other companies’. It is harder for subsidiaries to get bids. So subsidiaries are looking for other providers to win the contract.

Modification of the system is that regard the parent and subsidiaries as a whole. It means increasing the whole profit of the company. The total cost of the company is about $375. ($280+$28+$70=$375) When considering bids, subsidiaries just need to consider $350 as their costs. It is the low costs within the market and it is easy to win the contract. Parents and subsidiaries can make the contract to divide the money. For the parent, more bids means more inventories can be sold and for subsidiaries more contracts can be made. The profit earned by each parts is decided by the proportion they agreed. In this system, take the whole profit as a consideration and decrease the fixed costs efficiently.