Finnish paper company M-real produced paper and packaging products, the demand for which is highly influenced by the demand for end consumer products. Global demand decreased due to the global economic recession and during this same time energy and fuel costs increased. In efforts to maintain and improve profits, M-real embarked on a programme of reducing fixed and variable costs. The programme aimed to reduce variable costs across all businesses. The variable costs to be tackled were ‘primarily chemical, energy and logistic costs’, according to Mikko Helander, CEO of M-real. The planned measures aimed to increase profits by around €70 million per annum in a full year. On top of the cost reduction programme, the company also planned to increase profitability, by increasing profit margins.
Questions:
1 If your business wanted to improve profits by focusing on first fixed costs and then variable costs, what form of profit report might you use internally: one based on absorption costing or one based on variable costing?
2 What do you think would be the main variable cost for a paper company like M-real? Are there any ways in which a paper company might control this variable cost? Do some internet research on other paper companies to help you decide.