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Case - Planning at A Plywood Mill
Case - Planning at A Plywood Mill
Case - Planning at A Plywood Mill
The chief of planning at Standard Plywood Company is all set to plan for the next year. He has to face
two decisions, i.e. i) Plant Capacity and ii) Labour rate.
The plant capacity decision involves whether or not the firm should expand the mill, by how much and
when. If they decide to expand now, additional capacity can be added at first quarter of next year.
The second decision relates to labour organizations that are about to start with the company’s labour
union. The company and the labour union have to agree on a labour rate for the coming year. This is
a joint decision and the result of a negotiation process.
The company has prepared forecasts of the prices for the plywood that it will sell next year as well as
projections for how much would be sold (i.e. an estimate of demand). The company has a policy of
producing to order so that no inventory of plywood is maintained. This implies that the company
cannot sell more than what it can produce in any period. Forecasts, have been made for the price of
logs, the raw material from which the plywood is made.
In order to produce plywood, the company incurs expenses for (i) labour, (ii) supplies and (iii) raw
material i.e. logs. Other expenses are related to sales. The company leases its production equipment
and pays fees for these leases. There are also certain fixed (overhead) costs during each period.
The present capacity is 9,200 MSF per quarter. For each MSF of plywood that is produced, 0.52 MBF
of logs is required. The total labour hour required depends on the plywood production and the labour
productivity.
Each MSF of plywood uses $28 in supplies in the production process. Sales expense is 10% of sales
revenue. Fixed expense is $20,000 per quarter. The cost of leasing equipment is $11 per MSF of
installed capacity per quarter. The current labour rate is $9 per hour.
Questions:
1) Design a spreadsheet model to arrive at the profit for each quarter and the annual profit.
2) How much could the labour rate increase before the mill became unprofitable?
3) If for an addition of $2 in the labour rate, the union promises to improve the productivity to
0.5. is this proposal acceptable from profit point of view?
Decision Variables
LABOUR RATE: Average wage for mill employees (Dollar per hour)
Performance Measures
PROFIT: Net profit from operating the mill each quarter and for the year
Exogenous Variables
PLYWOOD PRICE: Sales price for plywood each quarter (dollar per MSF)
LOG COST: Purchase cost of logs (dollars per MBF – dollars per thousand board feet)
Intermediate Variables
LOGS REQUIRED: Amount of logs needed for production (MBF per quarter)
OTHER EXPENSE: Total of other expense including sales expense, fixed expense and
equipment expense per quarter
Profit
Capacity