Lorman Lumber Case Study

Topics: Net present value, Investment, Finance Pages: 5 (1511 words) Published: August 5, 2012
Case Study 2
What “Wood” You Do?

Lorman Lumber is a publicly traded company with widely held shares. Its Yamica location in rural Oregon is one of the company’s largest. The purpose of the plant is to process and treat wood, which it does through a number of facilities. The Sawmill began producing lumber products in 1947, which it does by peeling, milling, and chipping raw wood. Lorman has a known record of producing good profits, and will often pay out generous performance-based bonuses to executives. Although the Yamica plant is somewhat outdated, it is still considered to be efficient and profitable. Starting in 1968, the company began using new methods to condition and pressure-treat wood products through the use of preservatives. These chemicals, Creosote and PCP, are reported in recent data that suggests a possible link to various health disorders. The problem lies with a number of drainage ditches surrounding the plant that drain into the Mohegan River, which then leads to Yamica’s municipal water intake two miles downstream. The river is also used for recreational fishing, and houses sensitive fisheries. The plant’s drainage ditches are screened to remove the required level of contaminants by the EPA. This case focuses around Ben Watson, a young managerial accountant and assistant production manager for Lorman Lumber Co.’s Yamica sawmill. Ben has been with the company for six years, where he is working on an analysis of a proposed capital investment to recapture and recycle wastewater by refitting the Sawmill with a closed cycle system. Ben is under significant pressure because of this project: • • The data collected for the analysis is based on educated estimates, which given the sensitivity of the project, creates an uneasy feeling. The number of people affected: While the town of Yamica could have potential health problems from contaminants, the town relies heavily on employment at the Sawmill.

After meeting with the CEO of Lorman Lumber, Ben was told that the cost for refitting the plant would be substantial, and the plant would need to be shut down for a year and employees laid-off. If the investment is made in the closed cycle system, it would protect the Yamica community from potential health problems, but could decrease profitability of the company and eliminate employees. More information is required before moving forward with any decision however, a capital investment analysis is needed to be presented to the board of directors of Lorman Lumber Co. Ben is in a tenuous situation. His most important responsibility is to maintain integrity relative to his core job responsibilities and his commitment to ethical and profession practice as outlined by the IMA. His focus needs to be on providing objective analysis unbiased by his own opinions and those of other key stakeholders. Sometimes this means not letting his worries get ahead of the results, though this is often difficult to do. Ben Watson’s Responsibilities: 1. To all stakeholders: Fairly and accurately present accurate, clear, and concise data and analysis so that key decision makers can assess the best course of action for the company, the stockholders, the employees, and the community. Disclose all relevant information, including non-financial data. Disclose any deficiencies or concerns about the accuracy of the information. Practice with competence and credibility.

2. To his boss: o “Even though subsequent conversations were always friendly, Ben got the distinct strong impression that Jeff wanted an analysis that portrayed the “closed cycle” as a bad investment— although this was never stated explicitly.” In this case, Ben should practice integrity to avoid a conflict of interest from the company’s CEO, who not only employs Ben, but also provides and receives the benefit of generous performance-based executive bonuses. His responsibility also lies in credibility in order to avoid this conflict of interest, and report...
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