Sumerfit Paper Company

3480 Words14 Pages
Smurfit Paper Company (SPC) Marginal cost and pricing decisions in a commodity industry Objectives of this case study: • To review costing methods • To calculate the profitability of an incremental order using a full cost and a marginal cost approach • To understand the cost/volume/profit dynamics • To determine the break-even point of an incremental order • To review and measure the opportunity gains and costs of this additional order in a context of constraining capacity • To reengineer a cost structure according to a target costing approach • To understand strategic consequences of using a particular costing method. • To discuss the pricing issues in the context of a commodity business : the paper industry. The Smurfit Paper Company (SPC) is the local branch of an international paper giant which manufactures and sells paper-based packaging to various businesses in Spain and increasingly for European accounts. This company uses mainly recycled paper as raw materials. In June 2000, 6000 units of paper-based packaging1 were manufactured and sold. This amount accounted for 80 % of the company’s overall production capacity and was considered as an average, in terms of activity, based on the last two years’ figures. The sales manager, M. Juan Manuel Afonso, has been recently contacted by a new potential customer, the Multilever Food and Beverage Company (MFBC). This group is n° 2 on the European market a nd is currently reorganizing its production centres. Spain is going to become the main centre for packaging cold beverages and MFBC wants to replace glass, PET, metal bottles and cans by paper-based packaging. Studies by an independent packaging consultant had shown that attractive paper-based packaging could easily replace other packages and allow for significant cost reductions, paper becoming much cheaper than other sources since the last increases in oil

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