Case Scenario:
In 1994, President Bill Clinton denied a request from forest-products executives to lift the ban on timber sales from federal lands in the US Northwest. Historically, timber from US federal lands had been sold at below-market prices to provide local economic support. “For communities affected by federal timber, the outlook is dismal,” observed an industry consultant in Oregon. In a related development, the British Columbia, Canada, government in 1996 began implementing its Forest Practices Code, which has strict standards for logging activities and reforestation responsibilities. These developments have unfavorably affected a number of US wood and paper products companies that had relied heavily on timber sales from US and BC public lands. They have experienced higher material costs and have had access to lower volumes of timber. Other companies, however, have benefited from the price increases caused by the ban on federal timber sales and increased restrictions on logging in British Columbia because they have either large private timberland elsewhere or long-term supply contracts with private timber owners.
Longview Fibre Co. of Longview, Washington, was one of the companies adversely affected by these developments. For several years after the imposition of these restrictions, the company suffered higher material costs for most of its products. Since Longview Fibre was at a disadvantage compared to its competitors with unaffected sources of material, the company set a goal to significantly reduce its conversion costs. Following are the data that the company disclosed in one of its 1998 quarterly reports for each of its major product lines: timber products (logs and lumber), paper and paperboard, and container-board products (packaging).
LONGVIEW FIBRE CO
Consolidated Statement of Income (Unaudited)
For Six Months Ended April 30, 1998
Net sales:
Timber products............................................................. 79,045,000
Paper and paperboard ................................................... 92,433,000
Container-board products...............................................190,677,000
362,155,000
Cost of products sold (all products)..................................329,748,000
Gross profit ....................................................................32,407,000
Selling, administrative, and general expenses.....................32,313,000
Operating profit ..................................................................94,000
Operating profit (loss) by product:
Timber products............................................................. 37,309,000
Paper and paperboard ................................................... (11,842,000)
Container-board products............................................... (25,373,000)
....................................................................................... 94,000
April 30, 1998 October 31, 1997
Inventories:
Finished goods................................................ 25,445,000 24,832,000
Work in process .............................................. 19,220,000 13,868,000
Raw materials and supplies ............................. 48,192,000 45,802,000
92,857,000 84,502,000
Required:
Work in small groups to develop solutions to the following requirements and then be prepared to present them to the class.
1. Reconstruct the elements of the basic cost-flow model (BI _ TI _ TO _ EI ) for Finished Goods and Work-in-Process Inventories. (Hint: Work backward from cost of goods sold.)
2. Compute the average process cost per unit sold of each of the three product lines.
[Hint: Work backward from operating profit (loss) for each product.] Assume that selling, general, and administrative costs were assigned to product lines on the basis of relative revenue.
3. Average process costs per unit sold during the comparable period in 1997 follow:
Average Cost per Unit Sold 1997
Timber products, per thousand board feet ........... $230.47
Paper and paperboard, per ton ............................ 502.01
Container-board products, per ton ....................... 789.59
Compare the 1997 costs to the 1998 costs computed in part (b). During the 1998 period, the company’s costs increased as follows: raw timber, 8 percent; wood chips used to make paper, 36 percent; and container board, 12 percent. From these data, does it appear that the company achieved its goal of reducing conversion costs? Describe a likely scenario that explains the company’s changes in costs and 1998 profit performance. [Adapted from “Splinters Everywhere,” and Longview Fibre Co., Form 10-Q, April 30, 1998]