Kraft Pulp & Paper Co.

The Kraft Pulp and Paper Co. of Montana, is presently engaged in the production of
different grades of paper and paperboard - Chemkraft, Bleached board, Pine kraft, Kraft
board and Newsprint -. To produce this 5 different products the company operates 2
large paper machines. These machines may be operated around the clock for 365 days
per year.

A sales forecast made by the sales department just prior to January 1, 2017 indicates
that expected sales for the company's 5 products for the first quarter of 2017 can be
approximated by the schedule shown below. Expected demand for each product during
each month in the first quarter is expressed in terms of paper machine-hours, the
number of paper machine-hours of production capacity required to satisfy the demand
for a given product in a particular month (although demand for paper products is usually
expressed in tons, it is more convenient to utilize conversion factors obtained from the
time study group of the industrial engineering Department to express demand in paper
machine-hours).

Chemkraf Bleached Pine Kraft Newsprint

t board kraft board
January 100 150 225 --- 100
February 250 300 280 200 300
March 300 275 400 300 125

The expected capacities of the paper mill in machine-hours during the first quarter of
2017 are tabulated below in terms of 3 eight hours shifts "A", "B" and "C". Allowances
have been made for machine hours consumed by preventive maintenance and
breakdowns.

Past experience has indicated that breakdowns occur with greater frequency during the
two night shifts (B and C). Hence, the paper machine capacities for "B" and "C" shifts
are somewhat less than those for the "A" shift.

"A" shift "B" shift "C" shift

January 450 425 400
February 400 375 350
March 450 425 400

The company's labor contract with the International Brotherhood of Pulp, Sulphite and
Paper Mill Workers stipulates that employees working during the "B" and "C" shifts shall
receive premium wages. The aggregate labor premium for operating a paper machine
during the "B" shift is $ 15.00 per hour, where as the aggregate labor premium for the
"C" shift is $ 30.00 per machine-hour.

The Cost Accounting Department has developed the following schedule of costs for
storing one machine-hour of production of each of Kraft's 5 products for 1 month.

Storage cost per

Product machine-hour
per month
Chemkraft $ 8.00
Bleached board $ 2.00
Pine kraft $ 4.00
Kraft board $ 6.00
Newsprint $ 3.00

Problems:

1. Determine an optimum production schedule for the first quarter of 2017.

2. How might one go about estimating the monthly cost of storing one machine-
hour of production?, What costs would be included in the estimate?