Forest Hill Paper Company Case Study
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Evan Raimist and Amanda SniderForest Hill Paper CaseMBA 502-80-81 Forest Hill Paper Company is a small paperboard manufacturer that produces a wide line of paperboard products. While being smaller than other players, Forest Hill employs a very diverse strategy, offering 20 different grades of paperboard to their customers and offering an unparalleled level of customer service. They want to create a niche market that utilizes the flexibility of a small company to respond quickly to customer needs. Forest Hill’s market is very cyclical, with the market peaking every 3 or 4 years. While being small means that they can accommodate certain requests by customers that may make the customers choose them during these busy times, some of their operations create complexity in their processes that drives up costs. For example, because Forest Hill offers so many different grades and tries to accommodate their customer’s requests, a lot of orders need additional processing time. This adds overhead costs and raises costs that Forest Hill has to pay compared with if they offered more standard and uniform offerings. Additional examples are provided later, but Forest Hill’s strategy adds to the costs that they are incurring. For their cost system, Forest Hill currently uses a volume-based system that accounts for costs based on how much is made. They do this because thicker grades need more drying time (which adds overhead). However, they have not analyzed their costing system in a while. Under this system, overhead costs are 105% of materials costs. This is very high and as you will see later, the different costs are calculated and laid out. If Forest Hill were to switch to an activity-based costing system, they could more accurately track exactly how much each roll costs, as well as get a more focused overhead rate for their products. By using an activity-costing system, certain costs (like splitting costs) could be applied only to the products that need it rather than to every product. By using an activity-based costing approach, Forest Hill could more accurately define costs as well as get a better picture of what grades are making them money and which are potentially losing them money so they can analyze their offerings and see if they want to cut some out. By looking at using an activity-based costing system, Forest Hill could look at what they are more accurately spending money on and reevaluate offerings if needed. By looking at the two systems side by side, they can see that the volume-based approach is grossly over-estimating overhead and by switching, could cause Forest Hill to have a more accurate costing system.Forest Hill Paper Company is much smaller than a lot of the other players in the paper commodities market. They are privately held, meaning they don’t have the influx of funds that a publicly held company could have access to. This means that they have to make their funds stretch further to make sure they are maximizing all of their spending in order to get the biggest reward out of each dollar spent. By being a small company, being efficient is important so as to not have a lot of wasted time and money in order to try and stay competitive.
The nature of the paperboard industry that Forest Hill competes in is a very cyclical industry with peaks every 3 or 4 years. When the peaks occur, customers double or triple their order size to make sure they have enough and in turn, drive up prices for the products that are then in much higher demand. During the busy times, prices can reach record levels and demand exceeds their capacity. Forest Hill’s strategy in this industry is to be flexible to what customers want and need and to change their offerings and services accordingly. By being smaller than other manufacturers, Forest Hill is able to respond quickly to customer needs and provide a high level of personal customer service. They offer 20 different grades of paperboard and customers can pick different thicknesses, lengths, and whether it is coated or uncoated. This strategy is used because of their smaller size and because it is easier for them to adapt and change then larger companies.There are many things that Forest Hill does that plays into this strategy. Some of these actions make things more complex to Forest Hill than if they were attempting a different strategy. One of the complexities that drive up Forest Hill’s overhead costs is that some customers need added processing on certain roles. Some roles for food processors need a width of 18 inches rather than the norm of 12 feet. This adds set up costs and additional time to change widths on different orders. Their production process also adds some complexity with their elaborate equipment (needed to debark, dissent, and wash the pulp). This long and difficult process, and the uneven nature of the wood they receive, adds complexity to their process by not being standard. A third complexity that drives up their overhead costs are higher costs for thinker products. By offering 20 different grades, the varying thicknesses have different needs to causes Forest Hill to have to change certain steps in the process.Forest Hill’s current cost system uses a volume-based approach for capturing manufacturing costs and assigning them to products. They do this because thicker products need more machine time as well as more drying time (which increases energy costs). Forest Hill’s overhead rate is 105% of material cost because their total indirect costs is greater than their total direct cost for materials.Product GradeAverage Reels Per BatchMaterial Cost Per ReelTotal CostA50 $4,800 $240,000 B2 $5,200 $10,400 C35 $5,600 $196,000 D175 $7,400 $1,295,000 $1,741,400 Total Indirect Cost/ Total Direct Cost for Materials $1,828,470.00 / $1,741,400 = 105%The volume-based cost for one reel of Grade A is $9,840, $10,660 for Grade B, $11,480 for Grade C, and $15,170 for Grade D. These costs are based on the material cost for one reel plus the overhead (which is 105% of material cost). Broken down, the costs are:Product GradeMaterial Cost Per ReelOverhead Cost Per Reel (105% of Material Cost)Total CostA $4,800 $5,040 $9,840 B $5,200 $5,460 $10,660 C $5,600 $5,880 $11,480 D $7,400 $7,770 $15,170