Essay about Forrest Hill Case Analysis

1595 Words Sep 18th, 2011 7 Pages
Introduction

The Forest Hill Paper Company (FHPC) is a small, closely held paperboard manufacturer that produces “parent rolls” which are then distributed to converters for further processing. Due to their small size in comparison to many of their competitors in the industry, FHPC would be classified as a niche company as stated in the case. Part of FHPCs strategy, which will be looked at further below, is to create a niche based on service and rapid customer response that the larger manufacturing companies are too large to be able to do successfully.

Competitive Environment

The environment in which Forest Hill Paper Company operates in is a cyclical environment with upswings every three to four years. Due to the cyclical nature
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Product Number of Reels / Batch Material Cost / Reel Material Cost/Batch % of Total Mat Cost Overhead * % of Total Material Cost
A 50 $4,800.00 $240,000.00 13.78% $218,647.52
B 2 $5,200.00 $10,400.00 0.60% $9,474.73
C 35 $5,600.00 $196,000.00 11.26% $178,562.15
D 175 $7,400.00 $1,295,000.00 74.37% $1,179,785.60
TOTAL 262 $1,741,400.00 100.00% $1,586,470.00

Table 6: New Strategic activity based costing system
Y = Cost of Grade Change + Cost to Split Reel x # of Reels Split + Overhead Allocation Rate * Material Cost A = $11,750 + ($2,294.12 x 50) + (0.91103 x $240,000) = $345,103.20
B = $11,750 + ($2,294.12 x 0) + (0.91103 x $10,400) = $21,224.71
C = $11,750 + ($2,294.12 x 35) + (0.91103 x $196,000) = $270,606.08
D = $11,750 + ($2,294.12 x 0) + (0.91103 x $1,295,000) = $1,191,533.85 $1,828,467.84

Table 7: Comparison of old pricing model vs new strategic activity based pricing system.
Product (Grade) Old Allcoation Method New Allocation Method % Change
A $252,000.00 $345,103.20 36.95%
B $10,920.00 $21,224.71 94.37%
C $205,800.00 $270,606.08 31.49%
D $1,359,750.00 $1,191,533.85 -12.37%

Recommendation

With Forest Hill turning to an activity based costing system many things have become clearer. In the volume based system, costs were attributed to grades that did not belong. The slitting cost being

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