Forest Hill - Case Study

FOREST HILL PAPER COMPANY

BACKGROUND

Forest Hill is a small, closely-held paperboard manufacture which produces a broad line of paperboard in large reels. The company had long pursued a strategy of producing a full range of products. The company operates in a capital intensive industry which requires expensive processing equipment, and is facing a declining market share due to consumers’ trend toward plastic and more environmentally friendly grades of recycled paperboard.

QUESTIONS

1. It is small in size and closely-held (probably, privately-held) in term of ownership.

2. The nature of the industry is cyclical, with upswings every three to four years. Customers respond to limited supply during an economic boom, by doubling or tripling the quantities they ordered.

3. FHPC competes with a strategy of creating a niche based on service and rapid response to customer needs.

4. Some of the complexities that drive overhead costs of Forest Hill according to Exhibit 2 are Grade changes and slitting.

Grade changes and Slitting: These occurs because some customers require additional processing on the parent rolls, therefore the standard reel of 12feet will have to be further slit and studies shows that slitting are more expensive than thought. Also more quality inspection and testing are required to produce slit reel.

Grade changes, also produces a lot of scrap, due to the instabilities it introduces into the manufacturing process.

5. The current system used by FHPC is that product cost are calculated by multiplying the overhead rate by the material costs and the manufacturing overhead which consist of labor, energy, depreciation on capital equipment is approximated as 105% of material costs.

Total Material Cost:

PRODUCT | AVERAGE REELS PER BATCH (A) | MATERIAL COST PER REEL (B) | TOTAL MATERIAL COST $ (A*B) |

A | 50 | $4,800 | 240,000 |

B | 2 | $5,200 | 10,400 |

C | 35 | $5,600 | 196,000 |

D | 175 | $7,400 | 1,295,000 |

TOTAL | |...