This is an excellent short case to cover basic concepts in cost analysis for cost control and managerial decisions. The case always works well for me in class. Perhaps this is because the unusual industry context is intriguing to students who enjoy thinking about business issues in strange settings. Also, the topics covered have high common sense appeal. If students have not thought much about these issues before, this case is seen as very relevant new stuff. If they have studied these issues before, the case is seen as solid review in a "fun" business setting.
In addition to the four questions in the case, I assign the following question:
"Suppose bulk paper from scrap dealers is selling for $.015 per pound more than the price being offered at the loading dock for casual paper. Should management be emphasizing bulk purchases or casual purchases? What exactly can management do in the short run to change the product emphasis?"
ANSWERS TO ASSIGNMENT QUESTIONS
Question 1 (and Question 5)
I start the discussion of question 1 by asking a student to comment on the division manager's comment that it isn't possible for per-unit costs to be rising for both products when total volume is rising and total cost is falling.
Is there a logical impossibility here? The answer is no, but I believe it is useful for students to see why.
The division manager is on the "hot seat" because unit costs are rising and the president sees this as poor cost control. If the apparent per-unit cost increases are a logical fallacy, then the division manager is "off the hook" pretty easily.
In class, I used the following textbook introductory economics example of a situation where, for two products, total cost is declining, total volume is increasing, but unit...