The Forest Hill Paper Company is a thriving company, however, there are ways the company can improve its product cost allocation, and, thus, its profitability. After performing a thorough product cost analysis of the company, we, as the hired consultants of the company, have come up with a few recommendations on how to increase its efficiency and enhance the organization’s success.

First, as already mentioned, the company is using the simple-costing method for its product allocation, and, therefore, inadvertently misallocates its product costs for specific grades. Instead of spreading the costs uniformly to all grades using the material costs as a cost driver, the company should use the activity-based costing system to allocate its product costs. That way, the cost of each of the grades will be allocated based on how much activity (grade changes, slitting) it actually used. Moreover, the company will be able to assess the profitability of each of its grades more accurately.

Second, as seen in our product cost analysis, we calculated the profit margins of each of the four grades and determined their profitability. The company is overcosting product D and undercosting products A,B, and C. Moreover, product B has a negative profit margin, therefore, we suggest that the company drops this product. By dropping this product, the company will incur less in grade change costs, which will, consequently, increase its profitability. Also, as product D has the highest profit margin, the company should devote most of its resources to making larger amounts of this product.

Lastly, because the company operates in an environment with upswings every couple of years, the company should capitalize on its high marginal products (product D) during heavy times, and then use the achieved profit to invest in other product grades in order to become more successful among its