Forest Hill Paper Company

Ladarrius CookLawrence ComardelleSydney Stover

Classification of Forest Hill According to a recent IBIS World Report, U.S. revenue

for businesses in the paper manufacturing industry is $49 billion. As of August 2013, average growth within this sector is -2.7%, employment is 67,325, and total number of businesses equal 152. On average, that equals 442 employees per firm, and $322 million dollars per firm (+/-).

According to the case and information obtained on the U.S. industry size, Forest Hill can be classified as a “small paperboard manufacturer that produces a broad line of paperboard in large reels.”

Nature of the Industry Forest Hill competes in an industry that is being

stagnated by the rise in electronic communications (e.g. email) and imports.

According to the case, Forest Hill operates in a cyclical environment due to customer buying habits.

An advantage for Forest Hill is that there are high barriers to entry within this market due to equipment costs and governmental regulation.

Forest Hill Strategy According to the case, “ as a small company

competing against a commodity market, management believes Forest Hill must offer a full range of both products and services.

Thus, Forest Hill’s strategy is to create a niche based on service and rapid response to customer needs. (Not much innovation in the product, but top tier service, which can be quantified by value estimators.)

Complexities Some examples of the

complexities that drive overhead costs are as follows: production process (debarking, dissenting, and washing of the pulp), material costs of thicker products, and the increase of overhead costs due to product changes.

105% of the material costProduct Grade

Average Reels per Batch

Material Cost per Reel

Total Cost

A 50 4800 240000

B 2 5200 10400

C 35 5600 196000

D 175 7400 1295000

1828470/1741400=1.051.05(100)=105%

Volume-based Traditional CostsProduct Grade

Material Cost per Reel

Volume Based Price per Reel

Total Cost Volume Based Price

A 4800 5040 9840

B 5200 5460 10660

C 5600 5880 11480

D 7400 7770 15170

Grade change

8000+3000+5000+1000+30000=47000

4700/4=$11750

Slitting

Reels A -50 Reels C-35 Total Slitting Cost-$195,000 195,000/85=$2294.12 (cost to split one

reel)

Calculate the new volume-based overhead

Total overhead cost will adjust from $1,828,470 to $1,586,470.

($1,826,470-(47,000+195,000))

Resulting in an overhead rate of 91.1% of material cost.

($1,828,470 / $1,586,470)= 0.91

Determine the activity-based costs for grades A-D

Product Material

Cost Overhead# of

ReelsGrade

Change

Slitting Cost per

Reel Total Cost

A $4,800.00 $4,372.80 50 $235.00 $2,294.12 $11,701.92

B $5,200.00 $4,737.20 2 $5,875.00 $0.00 $15,812.20

C $5,600.00 $5,101.60 35 $335.71 $2,294.12 $13,331.43

D $7,400.00 $6,741.40 175 $67.14 $0.00 $14,208.54

Percentage change in costs

Traditional Strategic    

GradeCost Per

Reel Grade Cost Per

Reel Variance %

A $9,840.00 A $11,701.92 -$1,861.92 -18.9

B$10,660.0

0 B $15,812.20 -$5,152.20 -48.3

C$11,480.0

0 C $13,331.43 -$1,851.43 -16.1

D$15,170.0

0 D $14,208.54 $961.46 6.3

Conclusions from analysis

Grade Strategic Cost Selling Price Profit

A $11,701.92 $12,600.00 $898.08

B $15,812.20 $13,500.00 -$2,312.20

C $13,331.43 $14,200.00 $868.57

D $14,208.54 $19,500.00 $5,291.46

References IBIS Market Research Report 32212. Paper Mills in the U.S.

Market Research. Retrieved October 28, 2013 from IBISWorld database.

http://www.ibisworld.com/industry/default.aspx?indid=406 Newton, Chris. (2013) “Differences Between Applied

Manufacturing Overhead and Budgeted Manufacturing Overhead.” Retrieved from

http://smallbusiness.chron.com/difference-between-applied-manufacturing-overhead-budgeted-manufacturing-overhead-35542.html

Questions????