Montclair Papermill Case Study

Montclair Paper Mill--The "Deep Color" Grades

Accounting Case Study

Troy Pollard

August 9, 2005

Montclair Paper Mill - The "Deep Color" Grades

Overview of the Company

The Montclair Paper Mill, opened since 1892, is the oldest and smallest of the ten mills owned and operated by General Paper Company. Three months ago Tim Winton became the manager of the mill. Mr. Winton faced many challenges due to the legacy of previous leaders' lack of management skills. While preceding managers did not focus on external business opportunities, Winton is determined to consider a broader perspective when dealing with each customer. He believes that insight into the existing value chain will expand his knowledge and understanding of today's business operations. The acquired facts will allow him to make executive decisions that will enable the company to forge a promising and profitable future.

1. What can the mill do about this "problem"?

Montclair faces many obstacles in solving the company's current business status. The first hurdle in re-energizing the company is to boost employee morale. Current morale is low due to departments "passing the blame" on to anyone but their own department. Montclair needs to create a more team-oriented atmosphere in order to increase employee morale. One way to establish teamwork is to empower employees by encouraging company involvement.

The following options or a combination thereof will enable the company to sustain their position as a viable player in the paper industry:

Option #1: They could use a higher percentage of "green" scrap.

* Reduces dye costs

* More cost efficient

Option #2: Streamline Distribution Center operations.

* Eliminate inventory at the merchant, essentially eliminating the "middle man"

* Reduces cost to customers

* Encourages customer satisfaction

Option #3: Modify existing manufacturing procedures, by alternating production schedules.

* Eliminate waste

* Promotes time efficiency

* Will solidify our competitive advantage in the "premium paper" niche

Option #4: Allow sales representatives more freedom in pricing decisions based on order size, competitor pricing, and product cost.

* Foster long term relationships between customers and the company.

* Strengthen internal relationships by cross educating the departments. (Especially the cost setting and sales departments)

2. Can you calculate a "target cost" at the Montclair mill for the product described in Exhibits 1 and 2? So what? Assume here the "referent" product is the one made by our competitor--Ajax paper. For this particular end-use our "higher value" is not "worth it" to the customer (Reebok).

Target Cost:

Selling Price $2,310.00

15% profit $301.00

Target Cost $2,009.00

The customer is prepared to pay $2,310.00 if the product is sold to them directly. The standard cost is originally $2,900.00, which is a difference of $891.00 from the target cost of $2,009.00. In order to meet the selling price and to ensure a 15% profit for the company, the product would have to be produced meeting a target cost of $2,009.00.

3. Can you calculate the "ideal cost" for this product? So what?

Fiber: % Mix Market Price Cost

Hardwood 63% 425 $71.25

Softwood 15% 475 $267.75

Scrap 22% 60 $13.20

$352.00

Paper Machine:(Yield = 100%)

Fiber ($352/1) $352.00

Other materials & dyes ($550/1) $550.00

Machine conversion ($520/3/1) $173.00

$1,075.00

*NOTE: We used 0 for the amount of credit for the scrap generated due to this being an ideal situation!

All fiber will be used in the original process; therefore no scrap will be generated.

Converting: (Yield = 100%)

Paper ($1,076.00/1) $1,076.00

Sheeting & Packing ($500 per hour/3.5 tons/hour/1) $143.00

Pack & Ship to the DC $11.00

$1,230.00

*Due to a decline in changeover, the current costs of the sheeting and packing process would decrease