Topic: Smurfit Paper Company: Marginal Costs 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 commodiiquty business : the paper industry.
Working plan: part 1
1) Could you present appendix A following a contribution margin statement in value and per unit ?
2) Can you explain M Afonso’s calculation regarding the additional order? Do
you agree with it? What are the limits to this calculation ?
3) Determine the profitability of this additional order using:
a) a unit full cost approach
b) a marginal approach
Can you comment and elaborate on those calculations? What would be your
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Taught by Ramon Key, from 27-Sep-2018 to 20-Dec-2018. Order ref F305356.
Purchased for use on the Economia Empresarial, at IESA.
Educational material supplied by The Case Centre
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Order reference F305356
Gérard Naulleau / Emmanuel Zilberberg 6 Smurfit Paper Company 6
Working plan: part 2
Pricing decisions and strategies
4) Determine the break-even point for this additional order.
5) What would be your calculations and decisions if the company sells to
a) 1 800 units?
b) 1 000 units?
6) If the market were to set the price at 200 €, what would be the new
operating earnings for the company? What is the target unit cost SPC should
reach in order to get the same operating earnings as in June 2000?
(Base your calculation on an output of 7 500 units)
7) Finally, what are the pros and cons of signing the contract with MFBC?