Every business owner in the actual economy knows that cost management is a key factor in determining the successful continuation of the business, or its inevitable extinction. The paper industry is struggling to say the least according to an article in The Economist, with no new clients firms have adopted a strategy of merging with one another to attain a larger market share. With growing pressures from shareholders unsatisfied with low returns, it’s clear something has to change so when new potential business is available careful analysis of all relevant issues are paramount.
In the case of Smurfit Paper Company there is no exception to the rule, as the sales manager is faced with the opportunity to accept a proposition of producing between 1,000-1,800 units per month, depending on market demand for an upcoming company titled MFBC. A simple yes or no answer is needed however the many factors that has to first be investigated in order to realize the finest decision are far from simple, requiring marginal cost analysis, pricing decisions, uncertainty about demand, production capacity constraints, industry trends, and competitive advantages. Marginal production costs are among the most powerful drivers of commodity prices, in an industry where demand is elastic with close substitutes in the packaging sector. These very important issues have definite relationships the most glaring is the potential inability to fulfill an order over 1,500 units the number that would account to 100% of the company’s overall production capacity. An additional relationship amongst the relevant issues are the industry trends developing into a mature or stagnated market and the pricing decisions to accept a contract whose price is 20% lower than the current company average rates. Smurfit mission statement is simple “seeks to provide paperboard and packaging solutions for any customer, large or small”. Accepting MFBC proposal does coincide with the overall aim of the company however the potential of having quality drop in order to meet demand of the new business is an impending threat that would unquestionably be in contradiction of delivering a superior product.
Smurfit Paper Company(SPC) is faced with a difficult decision on their hands dealing with accepting Multilever Food and Beverage Company(MFBC). If they agree to the contract, they would take MFBC away from their main competitor, and after calculations, an increase in profitability ratio from their actual June figures. Or it could hurt the company, due to the fact that the paper industry is troubling over the years, according to an article in The Economist. This leading to lower prices for consumers which will hurt SPC. Should SPC agree to the contract?
To decide whether or not to sign the contract. We should analyze these problems in two ways. firstly we should do costs, profitability calculations. Then have a reasonable forecast the future of the industry.
Costs, profitability calculations
M. Afonso's calculation assigned the cost to each unit. In this way we can visually understand the cost of each unit, compare with price we can quickly calculate the profitability of each unit. This is a very direct and effective method of calculation, this calculation method is more convincing to the seller for intuitive analysis.
However, this calculation method is calculate based on an assumed number of products. First, the demand of the buyer are flexible, not 1500 units every month. Then, with the changes in the number of products base, the total cost per unit will be minor changes, this method of calculation cannot calculate the exact profitability, only give manger an approximate figure.
According to this case, The marginal approach method is the most appropriate calculation method. The unit full cost approach method, applied to an enterprise which produce numbers of different products. Then, according to the capacity of the...