Prepare a 2007 classified balance sheet

Eastvaco, Inc. A Comprehensive Managerial Case – Edition

Supporting Files 1. Eastvaco, Inc., 10K Report 2. Charlotte Facility Balance Sheet 3. Charlotte Facility Income Statement 4. Packaging Manufacturing Process 5. Paper Cup Manufacturing Process 6. Envelope Manufacturing Process 7. Ratio Worksheet Ratio Calculations Page 1 Page 2 Page 3 Page 4 Assignment Files 1. Initial Analysis of Eastvaco and the Charlotte Facility 2. Financial vs. Managerial Accounting 3. Balanced Scorecard 4. Cost-Volume-Profit 5. Manufacturing Alternative 5. Overhead Allocation 6. Activity Based Costing and Management (ABC) 7. Controlling Cost and Performance Managing 8. Target Costing 9. Breakroom Discussion 10. Costing, Budgeting and Internal Reporting 11. Variance Analysis 12. Organizational Structure 13. Company comparison and Evaluation 14. Global Expansison pp

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Name Activity Based Costing and Management Sue, the corporate controller, has thus far been impressed with your performance at the Charlotte plant. She thinks it is time for the Company to move forward with a more precise costing system. She meets with you to discuss if you are able to implement Activity Based Costing at Charlotte. Being on the fast-track, you are eager to demonstrate that you should be the successor to Sue and agreed to pilot ABC at Charlotte. You have gathered the following interim data for envelopes and cups. Total production overhead $5,017,500 Envelopes Cups Direct costs $8,250,000 $8,750,000 Units produced 1,500,000 350,000 Machine hours 200,000 50,000 Direct labor hours 34,500 153,625 Number of quality inspections 1,000 6,500 Revenue generated by the two products $15,000,000 $16,800,000 You have determined, using ABC, that overhead can be assigned to separate cost pools specifically: Pool 1 = $1,260,000 using machine hours as the cost driver Pool 2 = $2,257,500 using direct labor hours as the cost driver Pool 3 = $1,500,000 using the number of quality inspections as the cost driver Historically, Charlotte has used a single plant-wide rate, machine hours for the allocation of overhead. Required:

1. What are the steps in ABC implementation? 2. Provide 3 possible non-value added activities that the Charlotte facility may be experiencing? 3. Using the old plant-wide rate calculate gross profit and the rate of return on the two products. 4. Using the new cost pools and cost drivers calculate gross profit and the rate of return of the two

products.

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Name Company Comparison and Evaluation

1. Using the ratios provided in the file “RatioCalculations” calculate the ratios for Eastvaco. If you are unable to find sufficient data for any given area you must state so.

2. Go to the following URL: http://moneycentral.msn.com/investor/sec/filing.asp?Symbol=MWV This will take you to the 10Ks for Meadwestvaco. Use the 10K ending 12/31/2007. Compare the results from requirement 1 and compare Eastvaco with Meadwestvaco. Which company would you consider to be the most financially viable and why?

3. Compare the ratios you calculated for Eastvaco with industry averages and write a short memo discussing your evaluation. Your memo should be organized and well written.

Note: Use the “Ratio Worksheet” to calculate the ratios.

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Name Controlling Cost and Performance Measures Eastvaco, due to its decreasing financial condition, is concerned with maintaining control over their costs. This is particularly a problem at the Charlotte plant. The plant manager has been under some pressure to improve performance measurement. The three products, envelopes, cups and packaging are made from recycled materials. Unfortunately, there is not always enough recycled material available and Charlotte has to purchase other material. Since all three products have similar manufacturing processes some aggregation of data is possible. There are three product managers responsible for envelopes, cups and packaging, respectively. The plant manager asks the three product managers to meet with him to discuss how best to measure performance and control costs. A heated discussion erupts about the effectiveness of financial vs. nonfinancial measures. The cup manager contends that numbers do not tell the whole story while the packaging manager states, “numbers are objective” and is the only way to determine how we are doing. The envelope manager takes a middle ground, “we need both.” After several hours the plant manager becomes impatience and states, “how can we even begin to measure anything when my managers don’t agree on how or what to measure.” He asks for the following:

1. What nonfinancial issues and measures should we consider and why?

Your answers should be organized and well written.

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Name Costing, Budgeting and Internal Reporting Congratulations! You have been hired by Eastvaco as Plant Controller for the Charlotte facility. Your resume includes both financial and managerial accounting experience. You have had extensive experience in accounting for several manufacturing companies. You accepted this current position since it represents a substantial increase in responsibilities and you are eager to impress Sue and Tom. Sue, the Company Controller, has given you an extensive project. Eastvaco has enjoyed greater than industry average revenue, net income and cash flow. The Charlotte facility, initially, had a near monopoly on “green” stationary. Green stationary is constructed from recycled materials and reforested trees. Unfortunately, that is no longer the case. Due to increased pressure from competition the current business model is no longer producing satisfactory results. Eastvaco operates in a decentralized manner with each facility being treated as an investment center. You are shocked to find that the previous plant controller did not actively participate in financial planning since the Company and, the Charlotte plant in particular, was doing so well it was thought that it was not needed. Sue explained that, due to the reduced revenue and profit margins, the Company was seeking a large bank loan specifically for the Charlotte facility. As part of the loan process the bank is requiring a budget. During your meeting with Sue you received a brief history of Eastvaco and the Charlotte Subsidiary. You listen intently has Sue gives you the following overview. Eastvaco Corporation, a Delaware Corporation incorporated in the early 1900s is one of the major producers of paper and paperboard in the United States. The company converts paper and paperboard into a variety of end products, manufactures a variety of specialty chemicals, produces lumber, sells timber from its timberlands and is engaged in land development. In Brazil, it is a major producer of paperboard and corrugated packaging for the markets of that country and also operates a folding carton plant. Eastvaco also has a folding carton plant in the Czech Republic. Eastvaco exports products from the United States, Brazil and the Czech Republic to other countries throughout the world. The Charlotte facility was created in the late 1980’s whose mission was to produce high quality, environmental friendly, paper products. The Company believed, due to the substantial EPA violations and public opinion regarding the environment, that a cutting edge, low carbon footprint plant needed to be built. The Company uses the Charlotte facility as their premier plant and is used in much of their public relation campaigns. In the beginning the plant was enjoying a comfortable market share of green paper products. This was due to extensive advertising and relatively little competition in the use of green technology. The previous controller, Jim Person, had been with the Company for 28 years. While experienced and knowledgeable, he often relied on outdated methods of gathering information. He did not utilize all available information and reports (other than required financial reports) were not very extensive. In particular, internal reports and analyses were not considered a high priority. Sue continues explaining that “those times are over.” We need more and better internal reporting. The Charlotte plant is no longer enjoying the large market share it once experienced. Also, revenue, net income and cash flow have declined. “This is unacceptable to the CEO and Board of Directors and must be addressed.” The Board has authorized a large bank loan to upgrade facilities but due to the previous controller’s attitude, we simply do not have the required reports that will likely be required by banks. Sue has

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provided you with a complete set of financial statements, complete with Charlotte specific financial information. She strongly suggests that you begin by reading the complete set of statements that Eastvaco included in their SEC 10K report. After an intensive analyses of available information you prepared al budget worksheet. The following information is provided: fixed cost for 2007 totaled $6.5 Million, variable cost for envelopes is $15.3 Million, cups is $9.3 Million and packaging is $3.3 Million. Sue provided the following information. The envelopes and cups consist of various colors and sizes. You have not attempted to prepare any budgets by individual product lines. Fixed overhead consist of two categories of costs, depreciation and miscellaneous (taxes, supervisor salaries, etc.) Each category is allocated to individual product lines in proportion to estimated sales value of the goods produced in each year. The association between variable manufacturing costs and sales is based on actual activity in the latest year. It is estimated that general and administrative expenses will remain constant. The previous expenditure (10% of the prior year year’s total sales) for marketing will also remain constant. The anticipated bank loan will carry a 7% interest rate. After reviewing the above analyses and schedule Sue has some additional task and questions. You are to respond to the following inquiries. REQUIREMENTS:

1. Sue ask for you to prepare a well organized and formatted schedule showing what the variable manufacturing cost is, as a percentage of total sales, for each of the three product lines for 2007. Sales were Envelopes = $18M, Cups = $11.6M and Packaging = $6.6M Total Sales = $36.2 M

2. Calculate the 2007 weighted average contribution margin. 3. Calculate breakeven in dollars for 2007. (Hint: You will need the information from previous

requirements.) Additional Information: The home office rejected your proposed budget. This is based on their belief that the loan would not be granted based on your budget. The Plant Manager offers an alternate plan. He wants to increase the advertising budget to $3.8 million (was$3.6M). This he thinks will cause an increase in sales. This would create

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enough profit to have the loan approved. Assume that the advertising cost is treated as a fixed cost.

4. Given the comments above, how much would the company’s profit increase? (Hint, use the weighted average contribution margin you calculated in requirement #3. Calculate increase in revenue after additional variable costs then subtract additional fixed cost)

5. What other ways could you allocate fixed manufacturing costs?

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Name Discussion Overheard in the Breakroom Bob Manson, the plant manager for the company’s Charlotte, NC facility, was attending a weeklong meeting with other plant managers at the corporate headquarters. Bob is unhappy because he feels he has been left out of the information loop. John and Jason, two other plant managers, agree with Bob that needed information has been withheld. Bob, states “Every since Jane Goodman became head of information services she has been trying to make a name for herself by reducing the level of information passed on to us. “ “I realize she is attempting to save the company money but at our expense. We need that information to run our business.” John and Jason both agreed. Bob tells John and Jason that he has an idea and wants their opinion. Bob says, “I know someone in Jane’s department that will run any report I ask for. I may have to give him a little something for his efforts but it’s worth it. If we can’t get what we need by going through channels then we will get it however we can.” John replies, “why not, it isn’t like we are using it for our purposes. We need the information to keep on top of things.” Jason isn’t so sure. He asks, “Is this the right thing to do?” Bob rebuts with, “we can do a better job and the company benefits, so what is wrong?” Requirement: Write a short narrative discussing Jason’s last statement. Your answer should be organized and well written.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2007 Eastvaco Corporation (Exact name of registrant as specified in its charter) Part I Item 1. Business General Eastvaco Corporation, a Delaware Corporation incorporated in 1899 as West Virginia Pulp and Paper Company, is one of the major producers of paper and paperboard in the United States. The company converts paper and paperboard into a variety of end products, manufactures a variety of specialty chemicals, produces lumber, sells timber from its timberlands and is engaged in land development. In Brazil, it is a major producer of paperboard and corrugated packaging for the markets of that country and also operates a folding carton plant. Eastvaco also has a folding carton plant in the Czech Republic. Eastvaco exports products from the United States, Brazil and the Czech Republic to other countries throughout the world. The term "Eastvaco" or "the company" includes Eastvaco Corporation and its consolidated subsidiaries unless otherwise noted. Business segments The company's operating divisions have been classified into reportable segments based upon the nature of their products and services within three major product categories, with separate disclosure of our Brazilian packaging operation, Rigesa, Ltda. Financial information about the company's business segments is contained in Note O to the consolidated financial statements, included in the 2007 Eastvaco Annual Report and is incorporated herein by reference. Marketing and distribution The principal markets for Eastvaco's products are in the United States. Sales to customers outside the United States made up approximately 24% of Eastvaco's total sales in 2007 (2006 and 2005- 25%). Substantially all products are sold through the company's own sales force. Eastvaco maintains 30 sales offices located throughout the United States and 30 in foreign countries (Europe and South America). Forest resources The principal raw material used in the manufacture of paper, paperboard and pulp is wood. Eastvaco owns 1,446,000 acres of forest land in the United States and southern Brazil (more than 1,000 miles from the Amazon rainforests). Eastvaco's Cooperative Forest Management Program provides an additional source of wood fiber from the 1,370,000 acres owned by participating landowners and managed with assistance from Eastvaco foresters. Eastvaco's strategy, based on the location of its mills and the composition of surrounding forest land ownership, is to provide a portion of its wood fiber from company-owned land and to rely on private woodland owners and residues from independent solid wood products plants for substantial quantities of wood. During 2007,

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Eastvaco furnished 39% (2006-36%, 2005-39%) of its wood requirements from company-owned land, and an additional 8% (2006-7%, 2005-8%) was purchased from landowners in the Cooperative Forest Management Program. The remainder was purchased from other private landowners and sawmills by mill wood procurement organizations. The wood procurement system includes 27 pulpwood concentration and processing yards that are strategically located to store and ship wood to the mills as needed. The Cooperative Forest Management Program, private landowners and sawmills continue to provide adequate volumes of timber to meet our external fiber needs. The company has no reason to expect that these sources will be unable to furnish adequate wood supply in the future. Eastvaco supplied 100% of the wood for its Brazilian mill from company plantations. Eastvaco forests include plantations, natural stands and fiber farms. The inventory of growing trees, the basis for volume production, has increased steadily over the last decade in spite of a steady rise in the volume of wood harvested. Most of the pine stands harvested are plantations that are regenerated by establishing new pine plantations. Most hardwood stands that are harvested are re-established by planned natural regeneration from seeds and sprouts. Eastvaco's hardwood plantation and fiber farm programs are expanding and involve several domestic species. The quantity of wood harvested by Eastvaco from its lands in any year is primarily controlled by long-range forest management programs based on integrated wood supply plans. Eastvaco forest are being depleted rapidly without a foreseeable source for future production. World pressure is being focused on the Brazilian rain forest threatening the harvest of timber. The Charlotte plant has focused on recycled materials for the production of envelopes, paper cups and packaging material. The Company has put considerable resources in making the Charlotte facility a “green” production facility. In addition to recycling the plant has significantly reduced its carbon footprint and the flagship of Eastvaco’s operations. Recently there has been an alarming shortage of recycled wood products. The Company is committed to continue infusing the Charlotte plant with the necessary resources to maintain its status as the leading “green paper production” plant in the United States. See Charlotte specific financial statements. Patents Eastvaco has obtained a number of foreign and domestic patents as a result of its research and product development efforts. Eastvaco is the owner of many registered trademarks for its products. Although in the aggregate, its patents and trademarks are of material importance to Eastvaco's business, the loss of any one or any related group of such intellectual property rights would not have a material adverse effect on the business of the company. Competition Eastvaco competes in very competitive domestic and foreign markets. Eastvaco's strategy is to develop distinctive and innovative products and services for its customers in the United States and world markets. There are many large, well established and highly competitive sellers competing in these markets as well. The company competes principally through quality, value-added products and services, customer service, innovation, technology, product design and price. The company's business is affected by a range of macroeconomic conditions, such as industry capacity, economic growth in the U.S. and abroad, and currency exchange rates. Research Eastvaco operates major research facilities at Laurel, MD, North Charleston, SC, and Covington, VA, which provide process and

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product support for our manufacturing operations as well as a forest science laboratory at Summerville, SC. Forest research conducted there, and at satellite centers at Wickliffe, KY, Rupert, WV, and Tres Barras, State of Santa Catarina, Brazil, is focused on biotechnology, genetics, tree nutrition, regeneration, stand management, environmental protection and forest measurements. The goal is increased timber and fiber production on a sustainable basis. The company's larger divisions and subsidiaries also have product development staffs which work on product-related projects directed toward specific opportunities of the individual units. In 2007, the company incurred $47.3 million (2006-$45.1 million, 2005-$42.9 million) of research and development costs. Substantially all of the research projects are company sponsored. Approximately 245 scientists were employed in research and development activities. Environmental protection Eastvaco is subject to federal and state environmental laws and regulations in all jurisdictions in which it has operating facilities. Compliance with these requirements involves the diversion of capital from production facilities and increases operating costs. In the opinion of Eastvaco's management, environmental protection requirements are not likely to adversely affect the company's competitive industry position since other domestic companies are subject to similar requirements. In 2003, the company authorized removal of elemental chlorine from all of its pulp bleaching processes. This important initiative, completed during 2005 at a cost of approximately $110 million, represented a major step by Eastvaco in addressing subsequent EPA regulations for the U.S. pulp and paper industry regarding air and water quality. These regulations, known as the Cluster Rule, were published in the Federal Register in April 2006. The company anticipates additional capital costs to comply with other parts of these new regulations over the next several years to be in the range of $100 million to $150 million, which will also increase operating costs in the range of $3 million to $7 million annually. Environmental organizations are challenging the EPA regarding certain aspects of the Cluster Rule in the U. S. Court of Appeals. Eastvaco and other companies are participating in that litigation. If the legal challenge by environmental organizations to the regulations is successful, the company could face additional compliance costs of up to $150 million over the next several years. See Part I, Item 3, "Legal proceedings," "Other matters." Employees At October 31, 2007, Eastvaco employed approximately 12,750 persons, of whom 5,980 domestic employees are represented by various labor unions under collective bargaining agreements. Approximately 1,990 employees of Rigesa, Ltda. ("Rigesa"), Eastvaco's Brazilian subsidiary, are represented under collective bargaining arrangements. Eastvaco believes its labor relations are good. International operations In Brazil, Rigesa operates a paperboard mill, a corrugated box plant and a consumer packaging plant in Valinhos, State of Sao Paulo; a paperboard mill in Tres Barras, State of Santa Catarina; and corrugated box plants in Blumenau, State of Santa Catarina; Manaus, State of Amazonia; and Pacajus, State of Ceara. Rigesa is one of the few paper companies in Brazil which is integrated from the forests to the markets. This fact, combined with technology drawn from Eastvaco's U.S. experience, has provided Rigesa with a history of high-quality products and strong growth. Rigesa accounted for approximately 13% of packaging segment operating profit in 2007. The international economic crisis has adversely impacted economic growth in Brazil and negatively impacted the operating results of Rigesa.

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Eastvaco's Czech Republic subsidiary, Eastvaco Svitavy, spol. s r.o. ("Svitavy"), operates a consumer packaging plant in that country. Svitavy supplies consumer packaging to the markets of Eastern, Central and Western Europe. The packaging is made primarily from distinctive paper and paperboard produced by Eastvaco in the United States. Export sales from Eastvaco's U.S. operations made up approximately 18% of Eastvaco's 2007 sales (2006-17%, 2005-16%). Sales of our foreign operating subsidiaries, including exports, were 6% of Eastvaco's total sales (2006-8%, 2005-9%). While there are risks inherent in foreign investments, Eastvaco does not believe at this time that such risks are material to its overall business prospects. Properties The location of Eastvaco's production facilities and their principal products in each business segment as of October 31, 2007, were as follows: Paper Location Product Charlotte, NC Envelopes, paper cups and packaging Columbia, SC Pulp Luke, Maryland White printing and converting papers Wickliffe, Kentucky White printing and converting papers, and market pulp Tyrone, Pennsylvania White printing and converting papers Atlanta, Georgia Envelopes Dallas, Texas Envelopes Enfield, Connecticut Envelopes Indianapolis, Indiana Envelopes Kenosha, Wisconsin Envelopes Los Angeles, California Envelopes Springfield, Massachusetts Envelopes West Boylston, Massachusetts Envelopes Williamsburg, Pennsylvania Envelopes Springfield, Massachusetts Flexible packaging and paper cups Packaging Location Product Covington, Virginia Bleached paperboard North Charleston, South Carolina Saturating kraft, containerboard and folding carton stock Low Moor, Virginia Extrusion coated bleached paperboard Cleveland, Tennessee Folding cartons Newark, Delaware Folding cartons Richmond, Virginia Folding cartons Svitavy, Czech Republic Folding cartons Valinhos, Sao Paulo, Brazil Folding cartons Richmond, Virginia Cartons for liquid products Tres Barras, Santa Catarina, Brazil Containerboard and kraft papers Valinhos, Sao Paulo, Brazil Corrugating medium (principally from recycled papers) Blumenau, Santa Catarina, Brazil Corrugated boxes Manaus, Amazonia, Brazil Corrugated boxes Pacajus, Ceara, Brazil Corrugated boxes Valinhos, Sao Paulo, Brazil Corrugated boxes Summerville, South Carolina Building products Chemicals

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Location Product Covington, Virginia Activated carbon products and services Wickliffe, Kentucky Activated carbon products and services DeRidder, Louisiana Printing ink resins and tall oil derivatives North Charleston, South Carolina Lignin-based surfactants and tall oil Capacity and production Capacity estimates are based on the expected operations and product mix of each of the locations. Whether these estimates can in practice be attained or exceeded is dependent upon a variety of factors such as actual product mix, quantity and timing of production runs, required maintenance time and labor conditions. The approximate annual productive capacity is 3,143,000 tons for the paper and paperboard mills (including the Charlotte facility) and 761,000 tons for the converting plants. The 2007 production from these facilities was 2,992,000 and 538,000 tons, respectively. The mills supplied 70% of the paper and paperboard needs of the converting plants. The annual productive capacity for the chemical plants is 459,000 tons. In 2007, 363,000 tons of specialty chemicals were produced. Leases See Note I to the consolidated financial statements, incorporated by reference in Part II of this report, for financial data on leases. Substantially all of the leases of production facilities contain options to purchase or renew for future periods. Other information Certain Eastvaco facilities are owned, in whole or in part, by municipal or other public authorities pursuant to standard industrial revenue bond financing arrangements and are accounted for as property owned by Eastvaco. Eastvaco holds options under which it may purchase each of these facilities from such authorities by paying a nominal purchase price and assuming the indebtedness owing on the industrial revenue bonds at the time of the purchase. The sale is contingent upon maintaining a "green" manufacturing process. The company owns in fee all of the mills, plants and timberlands listed in Item 2, except leased facilities and those described above. Eastvaco's mills, plants and related machinery and equipment are considered by the company to be well maintained and in good operating condition. Item 3. Legal proceedings In 2003, the company authorized removal of elemental chlorine from all of its pulp bleaching processes. This important initiative, completed during 2005 at a cost of approximately $110 million, represented a major step by Eastvaco in addressing subsequent EPA regulations for the U.S. pulp and paper industry regarding air and water quality. These regulations, known as the Cluster Rule, were published in the Federal Register in April 2006. The company anticipates additional capital costs to comply with other parts of these new regulations over the next several years to be in the range of $100 million to $150 million which will also increase operating costs in the range of $3 million to $7 million annually. Environmental organizations are challenging the EPA regarding certain aspects of the Cluster Rule in the U.S. Court of Appeals. Eastvaco and other companies are participating in that litigation.

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If the legal challenge by environmental organizations to the regulations is successful, the company could face additional compliance costs of up to $150 million over the next several years. The company is currently named as a potentially responsible party with respect to the cleanup of a number of hazardous waste sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state laws. While joint and several liability is authorized under CERCLA, as a practical matter, remediation costs will be allocated among the waste generators and others involved. The company has accrued approximately $5 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. In addition, the company is involved in the remediation of certain other than CERCLA sites and has accrued approximately $10 million for remediation of these sites. Other matters In April 2007, EPA, Region III, issued Notices of Violation (NOVs) to seven paper industry facilities, including the company's Luke, MD, mill, alleging violation of EPA's Prevention of Significant Deterioration (PSD) regulations requiring special permitting and emissions evaluation prior to industrial expansion. The NOV received by the company primarily targets three capital projects at the mill, one in 1982 and two in 1997. The NOV alleges that the company did not obtain PSD permits or install required pollution controls, and it sets forth EPA's authority to seek $27,500 per day for each violation. The company has presented substantial data demonstrating that PSD requirements did not apply to the targeted projects and that new emission controls proposed by EPA are not required by the governing regulations. Unless the matter is resolved, an enforcement action may be brought against the company. Executive officers of the registrant The following table sets forth certain information concerning the relevant officers of Eastvaco Corporation: Name Present position Jerry Petersen President and Chief Executive Officer Terry Thompson Treasure and CFO Sue Carroll Company Controller Paul Manson Charlotte Plant Manager Item 8. Financial statements and supplementary data Information required by this item is included as part of the 2007 Eastvaco Annual Report under the captions "Consolidated statement of income," "Consolidated balance sheet," "Consolidated statement of shareholders' equity," "Consolidated statement of cash flows," "Notes to financial statements" and "Report of independent accountants," and is incorporated herein by reference. Management's discussion and analysis of financial condition and results of operations Financial statements CONSOLIDATED STATEMENT OF INCOME

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In thousands, except per share Year ended October 31 2007 2006 2005 Sales $2,801,849 $2,885,917 $2,982,288 Other income [expense] 29,384 18,747 28,743 2,831,233 2,904,664 3,011,031 Cost of products sold [excludes Depreciation shown separately below] 1,969,515 2,071,011 2,161,194 Selling, research and administrative expenses 230,963 238,097 240,814 Depreciation and amortization 280,470 280,981 269,151 Restructuring charge 78,771 - - Interest expense 123,538 110,162 93,272 2,683,257 2,700,251 2,764,431 Income before taxes 147,976 204,413 246,600 Income taxes 36,800 72,400 83,900 Net income $ 111,176 $132,013 $ 162,700 Net income per share: Basic $1.11 $1.30 $1.60 Diluted 1.11 1.30 1.58 Shares used to compute net income per share: Basic 100,236 101,311 101,978 Diluted 100,495 101,788 102,704 The accompanying notes are an integral part of these financial statements. Eastvaco Corporation and consolidated subsidiary companies CONSOLIDATED BALANCE SHEET In thousands At October 31 2007 2006 Assets Cash and marketable securities $ 108,792 $105,050 Receivables 318,369 286,423 Inventories 248,963 285,783 Prepaid expenses and other current assets 61,884 61,936 Current assets 738,008 739,192 Plant and timberlands: Machinery 5,094,773 5,079,177 Buildings 672,744 655,020 Other property, including plant land 226,977 224,229 5,994,494 5,958,426 Less: accumulated depreciation 2,779,199 2,634,702 3,215,295 3,323,724 Timberlands-net 266,386 273,975 Construction in progress 99,702 204,732 3,581,383 3,802,431 Other assets 577,301 467,045 $4,896,692 $5,008,668 Liabilities and shareholders' equity Accounts payable and accrued expenses $ 361,959 $ 346,552 Notes payable and current maturities of long-term obligations 50,200 99,072 Income taxes 12,955 21,501

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Current liabilities 425,114 467,125 Long-term obligations 1,502,177 1,526,343 Deferred income taxes 798,113 768,752 Shareholders' equity: Common stock, $5 par, at stated value Shares authorized: 300,000,000 Shares issued: 103,170,667 [2006- 103,170,667] 765,810 764,574 Retained income 1,607,504 1,588,932 Accumulated other comprehensive income [loss] [129,981] [32,167] Common stock in treasury, at cost Shares held: 2,877,824 [2006- 2,844,300] [72,045] [74,891] 2,171,288 2,246,448 $4,896,692 $5,008,668 The accompanying notes are an integral part of these financial statements. Eastvaco Corporation and consolidated subsidiary companies CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY In thousands Accumulated Common other Total Outstanding Common stock in Retained comprehensive shareholders' shares stock treasury income income/(loss) equity Balance at October 31, 2004 101,891 $750,457 $[19,745] $1,479,025 - $2,209,737 Net income - - - 162,700 - 162,700 Cash dividends - - - [89,778] - [89,778] Repurchases of common stock [610] - [20,880] - - [20,880] Issuance 649 11,065 8,315 [2,591] - 16,789 Balance at October 31, 2005 101,930 761,522 [32,310] 1,549,356 - 2,278,568 Comprehensive income Net income - - - 132,013 - 132,013 Foreign currency translation - - - - $ [32,167] [32,167] Comprehensive income 99,846 Cash dividends - - - [89,300] - [89,300] Repurchases of common stock [1,822] - [50,176] - - [50,176] Issuance 218 3,052 7,595 [3,137] - 7,510

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Balance at October 31, 2006 100,326 764,574 [74,891] 1,588,932 [32,167] 2,246,448 Comprehensive income Net income - - - 111,176 - 111,176 Foreign currency translation - - - - [97,814] [97,814] Comprehensive income 13,362 Cash dividends - - - [88,191] - [88,191] Repurchases of common stock [499] - [11,961] - - [11,961] Issuance 466 1,236 14,807 [4,413] - 11,630 Balance at October 31, 2007 100,293 $765,810 $[72,045] $1,607,504 $[129,981 $2,171,288 The accompanying notes are an integral part of these financial statements. Eastvaco Corporation and consolidated subsidiary companies CONSOLIDATED STATEMENT OF CASH FLOWS In thousands Year ended October 31 2007 2006 2005 Cash flows from operating activities: Net income $ 111,176 $ 132,013 $ 162,700 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 280,470 280,981 269,151 Provision for deferred income taxes 32,286 57,244 46,798 Restructuring charge 80,500 - - Pension credit and other employee benefits [78,658] [50,869] [39,296] [Gains] losses on sales of plant and timberlands [17,891] 894 [10,537] Foreign currency transaction [gains] losses 3,601 2,506 4,316 Net changes in assets and liabilities [2,577] [17,063] [43,380] Other, net 3,806 1,000 931 Net cash provided by operating activities 412,713 406,706 390,683 Cash flows from investing activities: Additions to plant and timberlands [228,879] [422,984] [621,172] Proceeds from sales of plant and timberlands 22,781 6,905 22,292 Other investments [22,659] - - Other, net [1,135] 50 5,912 Net cash used in investing activities [229,892] [416,029] [592,968] Cash flows from financing activities: Proceeds from issuance of common stock 9,122 3,766 10,901 Proceeds from issuance of debt 881,518 548,194 649,186 Dividends paid [88,191] [89,300] [89,778] Treasury stock purchases [10,792] [49,484] [17,374] Repayment of notes payable and long-term obligations [952,230] [470,146] [290,018] Net cash [used in] provided by financing activities [160,573] [56,970] 262,917

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Effect of exchange rate changes on cash [18,506] [4,011] [646] Increase [decrease] in cash and marketable securities 3,742 [70,304] 59,986 Cash and marketable securities: At beginning of period 105,050 175,354 115,368 At end of period $ 108,792 $ 105,050 $ 175,354 The accompanying notes are an integral part of these financial statements. Eastvaco Corporation and consolidated subsidiary companies Summary of significant accounting policies Basis of consolidation and preparation of financial statements: The consolidated financial statements include the accounts of all subsidiaries more than 50% owned. Investments in 20%- to 50%-owned companies are accounted for using the equity method. Accordingly, the company's share of the earnings of these companies is included in consolidated net income. In accordance with generally accepted accounting principles, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain prior years' amounts have been reclassified to conform with the current year's presentation. Accounting standards changes: Effective November 1, 2006, the company adopted Statement of Financial Accounting Standards (SFAS) No.130, Reporting Comprehensive Income, which establishes standards for the reporting and displaying of comprehensive income. During the fourth quarter of fiscal 2007, the company adopted, SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits which standardizes the disclosure requirements for pensions and other postretirement benefits. These two standards do not affect financial statement presentation and disclosure but do not have a material impact on the company's consolidated financial position or results of operations. The 2006 and 2005 comparative financial information has been restated to conform with the 2007 presentation. In June 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities which requires derivative instruments to be recorded in the balance sheet at their fair value,

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with changes in their fair value being recognized in earnings unless specific hedge accounting criteria are met. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, delayed the effective date of SFAS No. 133 to the company's 2001 fiscal year. Given the current level of its derivative and hedging activities, the company believes the impact of this new standard will not be material. Environmental matters: Environmental expenditures that increase useful lives are capitalized, while other environmental expenditures are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The estimated closure costs for existing landfills based on current environmental requirements and technologies are accrued over the expected useful lives of the landfills. The company is currently named as a potentially responsible party with respect to the cleanup of a number of hazardous waste sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state laws. While joint and several liability is authorized under CERCLA, as a practical matter, remediation costs will be allocated among the waste generators and others involved. The company has accrued approximately $5 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. In addition, the company is involved in the remediation of certain other than CERCLA sites for which the company has accrued approximately $10 million for remediation and closure costs. Translation of foreign currencies: Due to the decline in the rate of inflation in Brazil in recent years, effective November 1, 2005, the Brazilian real became the functional currency for the company's Brazilian operations. The assets and liabilities of the company's Brazilian subsidiary are translated into U.S. dollars using periodend exchange rates and adjustments resulting from financial statement translations are included inin the "Accumulated other comprehensive income (loss)" in the balance sheet. Revenues and expenses are translated at average rates prevailing during the period. Prior to November 1, 2005, the functional currency for these operations was the U.S. dollar due to the high inflation rate which previously existed in that country. Foreign currency asset and liability accounts were remeasured into U.S. dollars at fiscal year-end rates except for inventories, properties and accumulated depreciation, which were translated at historical rates; revenues and expenses (other than those relating to assets translated at historical rates) were translated at average rates prevailing during the year. Translation gains and losses were included in "Other income (expense)." Marketable securities: For financial statement purposes, highly liquid securities purchased three

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months or less from maturity are considered to be cash equivalents. Inventories: Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for raw materials, finished goods and certain production materials. Cost of all other inventories is determined by the first-in, first-out (FIFO) or average cost method. Plant and timberlands: Owned assets are recorded at cost. Also included in the cost of these assets is interest on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in "Other income (expense)." Costs of renewals and betterments of properties are capitalized; costs of maintenance and repairs are charged to income. Costs of reforestation of timberlands are capitalized. Depreciation and amortization: The cost of plant and equipment is depreciated, generally by the straight-line method, over the estimated useful lives of the respective assets, which range from 20 to 40 years for buildings and 5 to 30 years for machinery and equipment. The cost of standing timber is amortized as timber is cut, at rates determined annually based on the relationship of unamortized timber costs to the estimated volume of recoverable timber. The company periodically evaluates whether current events or circumstances warrant adjustments to the carrying value or estimated useful lives of its long-lived assets. Other assets: Included in other assets are goodwill and other intangibles, which are amortized using the straight-line method over their estimated useful lives of 10 years. The company periodically reviews goodwill balances for impairment based on the expected future cash flows of the related businesses acquired. Revenue recognition: The company recognizes revenues at the point of passage of title, which is at the time of shipment. Notes to financial statements A. Provision for restructuring During the fourth quarter of 2007, following completion of its strategic review process, the company adopted a plan to improve the its performance company's performance, principally to enhance the strength and focus of its packaging- related businesses. Additionally, the company reviewed certain long-lived assets in its business for impairment. As a result of the above initiatives, a pretax charge of $80,500,000 was recorded in the fourth quarter of 2007. This charge is primarily due to the writedown of impaired long-lived assets, involuntary employee termination and other exit costs. Production facilities were written down to

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their fair value using an assets-held-for-use model. An impairment of $67,430,000 was recorded as undiscounted cash flows were less than the carrying value of the assets prior to the impairment. Further, the company wrote off a paper machine and certain equipment with a total carrying value of $8,593,000 and abandoned the assets. In addition to the asset impairments described above, the company also recognized inventory write downs of $1,729,000 which have been included within the cost of products sold, employee termination costs of $1,508,000 and other exit costs of $1,240,000. B. Other income (expense) Components of other income (expense) are as follows: In thousands 2007 2006 2005 Gains [losses] on sales of plant, equipment and timberlands $17,891 $ [894] $10,537 Interest income 15,115 18,010 15,089 Foreign currency transaction gains [losses] [3,601] [2,506] [4,316] Other, net [21] 4,137 7,433 $29,384 $18,747 $28,743 C. Research and development Expenditures of $47,321,000 (2006-$45,139,000, 2005-$42,944,000) were expensed as incurred. D. Current assets Marketable securities of $39,349,000 (2006- $12,032,000) are valued at cost, which approximates market value. Receivables include $12,438,000 from sources other than trade (2006-$5,731,000), and have been reduced by allowances for discounts and doubtful accounts of $12,828,000 (2006- $12,748,000). Inventories at October 31 are composed of: In thousands 2007 2006 Raw materials $ 45,453 $ 55,580 Production materials, stores and supplies 66,191 74,338 Finished and in process goods 137,319 155,865 $248,963 $285,783 If inventories had been valued at current cost, they would have been $368,105,000 in 2007 (2006-$409,043,000). E. Interest capitalization In 2007, $132,428,000 of interest cost was incurred (2006-$130,914,000, 2005-$119,234,000) of which $8,890,000 was capitalized (2006-$20,752,000, 2005- $25,962,000). F. Accounts payable and accrued expenses Accounts payable and accrued expenses at October 31: In thousands 2007 2006 Accounts payable: Trade $118,413 $117,306 Other 18,812 24,258 Accrued expenses: Taxes, other than income 18,989 17,239 Interest 32,927 32,996 Payroll and employee benefit costs 85,179 83,652

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Other 87,639 71,101 $361,959 $346,552 G. Cash flows Changes in assets and liabilities are as follows: In thousands 2007 2006 2005 [Increase] decrease in: Receivables $[41,054] $ 12,765 $[23,674] Inventories 24,545 [17,249] [7,577] Prepaid expenses and other current assets [1,148] [5,905] 1,633 Increase [decrease] in: Accounts payable and accrued expenses 24,766 [5,597] [9,957] Income taxes payable [9,686] [1,077] [3,805] $[2,577] $[17,063] $[43,380] Reconciliation of capital expenditures on a cash basis: In thousands 2007 2006 2005 New investment in plant and timberlands $232,292 $419,705 $613,896 Less: debt assumed [158] [4] [21] net change in related current liabilities [3,255] 3,283 7,297 Cash additions to plant and timberlands $228,879 $422,984 $621,172 Cash payments for interest, excluding amounts capitalized, were $112,066,000 in 2007 (2006-$108,082,000, 2005-$84,503,000). Cash payments for income taxes were $12,108,000 in 2007 (2006-$13,744,000, 2005-$39,331,000). H. Leasing activities and other commitments The company leases a variety of assets for use in its operations. Leases for administrative offices, converting plants and storage facilities generally contain options which allow the company to extend lease terms for periods up to 25 years, or to purchase the properties. Certain leases provide for escalation of the lease payments as maintenance costs and taxes increase. The company has no significant capital lease Liabilities. At October 31, 2007, commitments required to complete currently authorized capital projects are $147 million. I. Notes payable and long-term obligations Notes payable and long-term obligations at October 31, 2007: In thousands Current Noncurrent Debentures: 9.65%, due 2002 $ 100,000 9 3/4%, due 2020 100,000 Sinking Fund Debentures: 7%, due 2004-2023 150,000 7 1/2%, due 2008-2027 150,000 7.65%, due 2008-2027 150,000 7.75%, due 2004-2023 150,000 8 1/8%, due 2000-2007 $ 2,350 17,100 8.30%, due 2003-2022 125,000 10 1/8%, due 2000-2019 5,000 95,000 10 1/4%, due 2000-2018 5,000 80,000 10.30%, due 2000-2019 5,000 95,000 Pollution Control Revenue Bonds:

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5.85-6.65%, due 2004-2018 26,620 5 7/8-5.9%, due 2000-2003 1,865 6,740 5 7/8-6.2%, due 2000-2007 550 11,480 5.9-6.2%, due 2004-2008 5,900 6 3/8%, due 2026 5,740 7 1/8-7 1/2%, due 2000-2001 1,500 2,000 8 1/4%, due 2000-2010 105 3,995 9 1/8-9.6%, due 2006-2015 10,100 10 1/2%, due 2004 1,500 Industrial Revenue Bonds: 7-7.67%, due 2000-2027 385 94,530 Economic Development Bonds: 8 3/4%, due 2000-2010 110 4,190 Notes payable and other 28,335 117,282 $50,200 $1,502,177 Outstanding noncurrent obligations maturing in the four years after 2000 are (in millions); 2001-$37.1; 2002-$133.3; 2003-$36.1; 2004-$56.6. The company has a revolving credit agreement for $500 million which expires December 31, 2000. Borrowings under the agreement may be in unsecured domestic or Eurodollar notes and may be at rates approximating prime or the London Interbank Offered Rate, at the company's option. There is a nominal commitment fee on the unused funds. These facilities are used to support commercial paper borrowings. There were no borrowings under this facility during 2007 and none in 2006. Recently the banks have expressed concern over meeting the terms agreed to in the debenture terms. At October 31, 2007, the book value of financial instruments included in notes payable and long-term obligations was $1,477,162,000 (2006-$1,557,477,000), and the fair value was estimated to be $1,495,290,000 (2006-$1,636,093,000). The company has estimated the fair value of financial instruments based upon quoted market prices for the same or similar issues or on the current interest rates available to the company for debt of similar terms and maturities. J Shareholders' equity During 2007, the company repurchased 460,000 shares (2006-1,800,000, 2005-500,000) of company stock under a repurchase program authorized in 2005 by the Board of Directors. The program was initiated to satisfy issuances under the company's stock option plans. There were no purchases in 2005, 2006 or 2007 under the stock repurchase program authorized in 1995 by the Board of Directors. At October 31, 2007, there were 44,170 shares of nonvoting $100 par value cumulative preferred stock authorized and 10 million shares of preferred stock without par value authorized and available for issue. K. Legal and environmental matters The company is involved in various legal proceedings and environmental actions, generally arising in the normal course of its business. Although the ultimate outcome of such matters cannot be predicted with certainty, the company does not believe that the outcome of any proceeding, lawsuit or

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claim that is pending or threatened, or all of them combined, will have a material adverse effect on its consolidated financial position, liquidity or long-term results of operations. In any given quarter or quarters, however, it is possible such proceedings or matters could have a material effect on results of operations. L. Business segment information In 2005, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." We adopted this statement Information, which the company adopted at October 31, 2007. Adoption of the standard had no impact on our net income. Previously reported segment information has been restated to conform to the new standard. Eastvaco is a leading manufacturer of paper, packaging and chemicals serving both U.S. and international markets. The company's operating divisions have been classified into reportable segments based upon the nature of their products and services within these three major product categories, with separate disclosure of Rigesa, Ltda., our wholly owned Brazilian packaging subsidiary. Following is a description of our reportable business segments: The paper segment is engaged in the manufacturing and Selling marketing of printing grade papers and envelopes. All of this segment's operations are in the United States. It operates three mills in the eastern half of the country and manufactures envelopes at nine domestic plants. The packaging segment manufactures, markets, and distributes various bleached paperboard, kraft paper and board, corrugated shipping containers, food containers, folding cartons and cartons for liquid products. These products are manufactured at two domestic mills and two mills located in Brazil; paper and sold to markets board are converted into packaging products at plants located in the eastern United States, Brazil and the Czech Republic. These products are sold primarily located in the United States with other operations conducted additional markets located in Brazil, Europe, Asia and the Pacific Rim. In Brazil, Rigesa is a major producer of paperboard and corrugated packaging for the markets of that country. Operating results for Rigesa are subject to the economic conditions in Brazil, including its inflation and currency fluctuations. The chemical segment manufactures products at four domestic locations. Major product groups are: activated carbon products and services; printing ink resins and lignin-based surfactants; tall oil fatty acid, rosin and derivative products. The corporate and other segment includes the company's forestry operations and income and expense items and activities not directly associated with segment operations, including corporate support staff services and related assets and liabilities. The segments are measured on operating profits before interest expense, income taxes, minority interest, extraordinary items and cumulative effect of accounting changes, except for Rigesa which is included in the Packaging Segment, in the packaging segment, whose operating profit includes interest income of $13.2 million in 2007 (2006-$14.6 million, 2005-$10.3 million) and interest expense of $4.6 million in 2007 (2006-$4.5 million, 2005-$6.1 million). The segments follow the same accounting principles described in the Summary of Significant Accounting Policies. Sales between the segments are recorded primarily at market prices. The restructuring charge following the completion of the company's strategic review related to

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paper, packaging, and chemicals was $21.2 million, $57.7 million and $1.6 million, respectively. No single customer accounts for 10% or more of consolidated trade sales in 2007. In 2006 and 2005, sales to a single customer accounted for approximately 11% of consolidated sales primarily from the company's packaging segment. Total sales outside of the United States, including sales of our foreign operating subsidiaries, accounted for approximately $663,483,000 in 2007 (2006-$709,567,000, 2005- $741,902,000). Export sales from the United States amounted to $504,480,000 in 2007 (2006-$499,792,000, 2005-$487,698,000). M. Business Combination In October 2007, Eastvaco signed a definitive agreement to acquire Temple-Inland's bleached paperboard mill in Evadale, TX. The company will pay $575 million for the mill's fixed assets and approximately $50 million for working capital. The acquisition will be accounted for as a purchase. The transaction is scheduled to close in December 2007. In connection with this pending acquisition, on November 5, 2007, the company issued $400,000,000 in notes comprised of $200,000,000 of 6.85% notes due November 15, 2004 and $200,000,000 of 7.10% notes due November 15, 2009. N. Selected quarterly information [unaudited] In thousands, except per share data Quarter 2007 2006 2005 Sales First $ 650,715 $ 702,113 $ 736,355 Second 679,481 724,187 724,593 Third 700,202 727,826 738,227 Fourth 771,451 731,791 783,113 Year $2,801,849 $2,885,917 $2,982,288 Gross profit First $ 119,239 $ 133,682 $ 131,145 Second 127,052 139,135 134,929 Third 139,515 130,835 137,467 Fourth 176,907 139,644 157,545 Year $ 562,713 $ 543,296 $ 561,086 Net income First $ 25,222 $ 32,516 $ 35,510 Second 27,295 34,606 37,940 Third 34,986 31,674 37,538 Fourth 23,673 33,217 51,712 Year $ 111,176 $ 132,013 $ 162,700 Net income per common share-basic First $ .25 $ .32 $ .35 Second .27 .34 .37 Third .35 .31 .37 Fourth .24 .33 .51 Year $1.11 $1.30 $1.60 Net income per common share-diluted First $ .25 $ .32 $ .35 Second .27 .34 .37 Third .35 .31 .37 Fourth .24 .33 .50 Year $1.11 $1.30 $1.58

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ELEVEN - YEAR COMPARISON Year ended October 31 2007 2006 2005 2004 2003 2002 EARNINGS, in millions, except per share data Sales $2,802 $2,886 $2,982 $3,045 $3,272 $2,607 Net income before extraordinary charge and cumulative effect of accounting changes 111 132 163 212 283 104 Net income 111 a 132 b 163 212 281 c 104 Net income per share - basic 1.11 1.30 1.60 2.09 2.78 1.03 Net income per share - diluted 1.11 1.30 1.58 2.07 2.76 1.03 Depreciation and amortization 280 281 269 240 230 219 COMMON STOCK Number of common shareholders 19,070 20,140 20,240 20,760 20,490 13,890 Weighted average number of shares outstanding [in millions] Basic 100 101 102 102 101 101 Diluted 100 102 103 102 102 101 Cash dividends [in millions] $88 $89 $90 $90 $78 $74 Per share: Dividends .88 .88 .88 .88 .77 .73 1/3 Book value 21.65 22.39 22.35 21.69 20.49 18.48 FINANCIAL POSITION, in millions Working capital $313 $272 $400 $297 $358 $269 Current ratio ? ? ? ? ? ? timberlands, net $3,581 $3,802 $3,684 $3,354 $3,140 $3,063 Total assets 4,897 5,009 4,899 4,437 4,253 3,983 Long-term obligations 1,502 1,526 1,513 1,153 1,147 1,234 Shareholders' equity 2,171 2,246 2,279 2,210 2,081 1,862 Debt to total capital ? ? ? ? ? ? OPERATIONS Primary production of paper,paperboard and market pulp [tons, in thousands] 2,992 3,028 3,058 3,001 3,105 2,848 New investment in plant and timberlands [in millions] $232 $420 $614 $511 $309 $207 Acres of timberlands

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owned [in tons] 1,446 1,465 1,461 1,452 1,453 1,453 Employees 12,750 13,070 13,370 13,430 14,300 14,170 The following per share data is for basic and diluted: a 2007 results include an after-tax charge for restructuring of $49 million, or $.49 per share, and a credit of $15 million, or $.15 per share, for a release of deferred taxes. b 2006 results include an after-tax charge for restructuring of $3 million, or $.03 per share. c 2003 results include an after-tax extraordinary charge of $2 million, or $.02 per share, for the extinguishment of debt. Eastvaco Corporation and consolidated subsidiary companies ELEVEN - YEAR COMPARISON, continued Year ended October 31 2001 2000 1999 1998 1997 EARNINGS, in millions, except per share data Sales $2,345 $2,336 $2,301 $2,411 $2,284 Net income before extraordinary charge and cumulative effect of accounting changes 57 136 137 188 223 Net income 104 d 136 137 e 188 223 Net income per share - basic 1.04 1.37 1.40 1.93 2.30 Net income per share - diluted 1.04 1.36 1.39 1.92 2.28 Depreciation and amortization 195 183 179 169 156 COMMON STOCK Number of common shareholders 14,570 14,970 15,020 15,630 15,530 Weighted average number of shares outstanding [in millions] Basic 100 99 98 98 97 Diluted 101 100 99 98 98 Cash dividends [in millions] $73 $73 $70 $66 $61 Per share: Dividends .73 1/3 .73 1/3 .70 5/6 .67 1/2 .62 2/3 Book value 18.18 17.84 17.21 16.53 15.27 FINANCIAL POSITION, dollars in millions Working capital $244 $319 $310 $370 $328 Current ratio ? ? ? ? ? Plant and timberlands, net $3,078 $2,838 $2,675 $2,539 $2,240 Total assets 3,928 3,704 3,462 3,332 2,961 Long-term obligations 1,258 1,055 970 961 768 Shareholders' equity 1,824 1,777 1,699 1,619 1,488 Debt to total

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Capital ratio ? ? ? ? ? OPERATIONS Primary production of paper, paperboard and market pulp [tons, in thousands] 2,626 2,595 2,587 2,512 2,499 New investment in plant and timberlands [in millions] $442 $352 $322 $472 $537 Acres of timberlands owned [in thousands] 1,462 1,468 1,483 1,487 1,467 Employees 14,440 14,520 14,440 15,040 14,960

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Name Financial vs. Managerial Accounting Terry Thompson, the treasure, has a dilemma, two of his supervisors are leaving, Jeff, supervisor of the management accounting function and Fred, supervisor of the financial accounting department. Terry’s background is finance and has only a basic understanding of accounting. He comes to you and asks, “I need to either hire someone from the outside or promote internally. What qualifications should I seek in each of the positions and what role do these positions play in strategic planning?” Required:

1. Answer each of the two questions asked by Terry. Your answer should be in the form of a well prepared memo.

2. In your own words, what is the difference between a financial and managerial accountant?

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Name Global Commerce - Research Project The president of Eastvaco is considering recommending to the Board of Directors expanding into the Asian market. He suggests that the Company open a manufacturing facility similar to the Charlotte facility. The plant would purchase its raw material from local sources and produce envelopes, paper cups and packaging. He contends since the Charlotte plant is having difficulty obtaining recycled material and he does not want to tarnish the plant’s “green” image. The Asian plant could produce non-green products. The product would be marketing heavily in China and Indonesia (where the plant would be established). Excess production would be sent back to the States to meet market demand. Required: You are asked by the President to prepare a short report regarding the following issues:

a. What information regarding the Asian rim region should the President include in his report to the Board?

b. Eastvaco’s strengths and weaknesses that would help and/or hinder the Asian expansion. c. Your conclusions and recommendations regarding the proposed expansion.

Organize your answer by requirement. Your answer should not exceed three pages and be well written. There is no minimum page requirement. This exercise requires research, imagination and writing skills.

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Name Initial Analysis of Eastvaco and the Charlotte Facility Read the financial statements and supplemental information provided by the 10-K submission and the Charlotte facility schedules. Attempt to gain some insight into how the company and its Charlotte plant are doing. Specifically, answer the following: Required:

1. What do you see as Eastvaco’s strengths and weaknesses?

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Manufacturing Alternatives and Relevant Costs

NAME

The Charlotte facility ‘s supply of recycled materials may no longer support three product lines. In addition , the following condensed quarterly income statement by product line has been provided. The General Manager of the Charlotte operations is concerned that envelopes is showing a $(15,000) loss. He is convinced that, regardless whether the Company can secure additional recycled materials, the envelope production should cease. The GM has asked you to prepare an analysis of the effect of discontinuing the production of envelopes. Sales Total Envelopes Cups Packaging Sales $1,100,000 $140,000 $500,000 $460,000 Variable Costs 510,000 60,000 200,000 250,000 Contribution Margin 590,000 80,000 300,000 210,000 Fixed Expenses: Advertising 216,000 41,000 110,000 65,000 Depreciation 95,000 20,000 40,000 35,000 Product Line Supervisor 19,000 6,000 7,000 6,000 General Overhead 200,000 28,000 100,000 72,000 Total Fixed Expenses 530,000 95,000 257,000 178,000 Net Income (loss) $ 60,000 $ (15,000) $ 43,000 $ 32,000 Required: Prepare a revised income statement assuming the envelope product line is eliminated. Assume that a pro rata amount of advertising is avoidable, product line supervisor salaries are avoidable, depreciation and general overhead are unavoidable. Should envelopes be eliminated and explain your answer? What role does opportunity cost have in this decision, explain?

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Name Organizational Structure and Inter-company Transfers Your answer should be organized and well written.

1. What type of center is the Charlotte facility? Would you characterize it as an investment center, profit center, revenue center or cost center? Give specific reasons why you chose your answer.

2. What are the advantages and disadvantages of a decentralized organization structure? 3. The Charlotte plant receives some products used in the manufacturing of envelopes, cups and

packaging from the South Carolina plant. Recently there have been some heated discussions about the prices charged Charlotte by the South Carolina plant. The product, cremodium, has cost Charlotte $80 per batch. This covers all marginal costs incurred by the South Carolina facility. The South Carolina facility is a profit center and agues that they can sell cremodium on the open market for $120. Which method, as presented in your text, should be used in this instance and why? Does it make a difference if the South Carolina plant has no idle capacity?

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Ratios Industry Avg Eastvaco Meadwestvaco

Quick Ratio 0.9 Current Ratio 2 Current Liabilities/Net Worth (%) 49 Current Liabilities/Inventory (%) 133.3 Total Liabilities/Net Worth (%) 114 Fixed Assets/Net Worth (%) 76.5 Sales/Inventory 10.1 Assets/Sales (%) 63.5 Sales/Net Working Capital 6.5 Accounts Payable/Sales (%) 76.5 Return on Sales (%) 3 Return on Assets (%) 4.2 Return on Net Worth (%) 9.8 Go to http://moneycentral.msn.com/investor/sec/filing.asp? Symbol=US%3aMWV for Meadwestvaco financial statements and SEC filings

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Name Variance Analysis The plant manager decides that what is needed is an objective appraisal of what should be done. He hires June Collins of Collins and Collins, CPAs. June recommends that the Charlotte plant should use standard cost variance analysis. While not all three product managers agree that this is the best course of action the plant manager makes the final decision and asks June to perform the analysis. June asks that the three product managers aggregate their production information. The following schedule is the result of the request. Variance Analysis Variance Stated as Variance Materials Price Variance Per ounce price Favorable Materials Quantity Variance Ounce per unit Unfavorable Labor Rate Variance Per hour Unfavorable Labor Efficiency Variance Time per unit Favorable Required:

1. Explain how each of the above variances could be explained. 2. Explain how the variances could explain the following situations: For instance: Inspection time increase

could be caused by either poor material leading to sub-quality products or using cheaper more inexperienced labor. This would result in a favorable materials price variance and/or an unfavorable labor efficiency variance indicating that the workers are taking too long to construct the product. Each of the below situations are to be considered independent Scrap Material decreased Return Orders increased Rework Time decreased Average Unit Cost increased Unexpected Downtime increased Sales was less than budgeted Volume-related revenue was less than anticipated (in this instance the company is selling multiple products)

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Eastvaco Balance Sheet (in thousands)

Assets 2010 2009 2008

Cash and Short Term Investments

2,073.00 1,892.00 1,144.00

Total Receivables, Net

3,039.00 2,695.00 3,288.00

Total Inventory

2,347.00 2,179.00 2,495.00

Prepaid Expenses

0 0 0

Other Current Assets, Total

569 785 433

Total Current Assets

8,028.00 7,551.00 7,360.00

Property/Plant/Equipment, Total - Net

12,002.00 12,688.00 14,796.00

Goodwill, Net

2,308.00 2,042.00 1,781.00

Intangibles, Net

0 248 246

Long Term Investments

1,092.00 1,077.00 1,274.00

Note Receivable - Long Term

0 0 0

Other Long Term Assets, Total

1,938.00 1,942.00 1,456.00

Other Assets, Total

0 0 0

Total Assets

25,368.00 25,548.00 26,913.00

Liabilities and Shareholders' Equity

Accounts Payable

2,556.00 2,058.00 2,119.00

Payable/Accrued

0 0 0

Accrued Expenses

1,634.00 1,650.00 1,808.00

Notes Payable/Short Term Debt

313 0 0

Current Port. of LT Debt/Capital Leases

0 304 828

Other Current Liabilities, Total

0 0 0

Total Current Liabilities 4,503.00 4,012.00 4,755.00

Total Long Term Debt

8,358.00 8,729.00 11,246.00

Deferred Income Tax

2,793.00 2,425.00 1,957.00

Minority Interest

250 232 232

Other Liabilities, Total

2,630.00 4,127.00 4,554.00

Total Liabilities

18,534.00 19,525.00 22,744.00

Common Stock

439 437 434

Additional Paid-In Capital

5,829.00 5,803.00 5,845.00

Retained Earnings

2,416.00 1,949.00 1,430.00

Treasury Stock - Common

-28 -89 -218

Other Equity, Total

-1,822.00 -2,077.00 -3,322.00

Total Equity

6,834.00 6,023.00 4,169.00

Total Liabilities & Shareholders’ Equity

25,368.00 25,548.00 26,913.00

Total Common Shares Outstanding

437.64 433.1 427.5

Total Preferred Shares Outstanding

0 0 0

Charlotte Facility Income Statement 2010 2009 2008

(in thousands) Revenue 25,179.0 23,366.0 24,829.0

Total Revenue 25,179.0 23,366.0 24,829.0

Cost of Revenue, Total 18,482.0 15,220.0 18,742.0

Gross Profit 6,697.0 8,146.0 6,087.0

Selling/General/Administrative Expenses,

Total

3,248.0 3,206.0 3,233.0

Research & Development 0.0 0.0 0.0

Depreciation/Amortization 1,456.0 1,472.0 1,347.0

Interest Expense (Income), Net Operating 608.0 0.0 0.0

Unusual Expense (Income) 371.0 1,412.0 1,986.0

Other Operating Expenses, Total 192.0 188.0 182.0

Operating Income 822.0 1,199.0 -1,153.0

Interest Income (Expense), Net Non-

Operating

0.0 0.0 0.0

Gain (Loss) on Sale of Assets 0.0 0.0 0.0

Other, Net 0.0 0.0 0.0

Income Before Tax 822.0 1,199.0 -1,153.0

Income Tax - Total 221.0 469.0 162.0

Income After Tax 601.0 730.0 -1,315.0

Minority Interest -21.0 -18.0 -3.0

Equity In Affiliates 64.0 -49.0 49.0

U.S. GAAP Adjustment 0.0 0.0 0.0

Net Income Before Extra. Items 644.0 663.0 -1,269.0

Total Extraordinary Items

0.0 0.0 -13.0

Net Income 644.0 663.0 -1,282.0

The Envelope Manufacturing 
 Process

Making wood pulp

1 Mechanical methods can be used to transform wood into pulp, but this produces a relatively weak paper that is

used for newspapers and similar products. Paper

intended to be used for envelopes is made from pulp

obtained by chemical means.

2 The most common chemical method used to make wood into pulp is known as kraft pulping. Chips of wood are

placed in a large, sealed container known as a digester.

The digester contains a strongly alkaline solution of

sodium hydroxide and sodium sulfide. The mixture is

heated to a temperature between 320-356° F (160-

180°C) at a pressure of about 116 pounds per square

inch (800 kilopascals) for about one-half to two hours.

3 Various methods exist to bleach the resulting pulp. Bleaching removes lignin, a substance found in wood

pulp that gives paper a brown color. In general,

bleaching involves mixing the pulp with a series of

oxidizing chemicals that react with the lignin. After

each mixture, the pulp is washed with an alkaline

solution that removes the treated lignin.

4 In order to improve the brightness, opacity, and

smoothness of the paper, fillers are added to the pulp. A

typical filler is a clay known as kaolin. Other chemicals

often added to pulp include various starches or gums to

make the paper stronger. Rosin (a substance derived

from pine trees) and alum (aluminum sulfate) are often

added as sizers. Sizing makes the paper less absorbent,

Most paper used in the manufacture of envelopes is

derived from wood. The wood is mechanically or

chemically processed to produce pulp that is then

poured on mesh screening and squeezed through rollers

to remove the moisture. The formed sheets of paper

move through a series of heated cylinders that dry the

paper further. The sheets are then wound on reels.


 
 so that addresses written on the envelope in ink

will not run and blur.

Making paper

5 Pulp is added to water to form a very dilute slurry in order to make paper with an even density. The slurry is

pumped onto a moving mesh screen. This screen is

made up of very fine wires of metal or plastic. Water

drains through the small openings in the mesh, forming

a sheet of wet material from the slurry. Rapidly

spinning rollers beneath the mesh create suction, a

partial vacuum that removes more water from the

mixture.

6 The sheet is moved on a belt made of felt containing wool and synthetic fibers. The felt absorbs water and

prevents the sheet from being damaged as it moves

between rollers, which squeeze out more water. The

sheet then moves to a belt made of felt containing

cotton and other fibers. This lighter felt allows water

vapor to escape as the sheet is moved around a series of

steam-heated rollers. As many as 40-70 rollers may be

needed to dry the sheet.

7 The dried sheet moves between rollers known as calendars to make it smooth. It is then wound on a large

reel. Variations in the papermaking process produce

paper in a wide variety of basis weights. The basis

weight of paper is the weight, in pounds, of a ream of

480 sheets cut to a size of 24 x 36 in (610 x 914 mm).

Envelope paper usually has a basis weight between 16

and 40, with a basis weight of 24 being typical.

Although many other kinds of paper are coated after

being made, envelope paper is usually uncoated.

Making envelopes

8 Rolls of paper, typically weighing 220 lb (100 kg), arrive at the envelope factory. The paper may need to be cut

before it enters the automated machine that makes the

envelopes, or it may be fed directly into the machine

from the roll. If it is cut outside the machine, it is first

cut by sharp Rolls of paper, typically weighing 220 lb

(100 kg), are either cut before they enter the automated

machine that makes the envelopes, or fed directly into

the machine from the roll. Once cut, the sheets are

stacked and cut into blanks. A blank has the shape of an

envelope with its flaps opened and laid flat. Blanks are

generally shaped like diamonds and are cut from the

sheets in such a way as to minimize waste. If the roll is

fed directly into the machine, it cuts the paper into

blanks very quickly with sharp blades. The machine also

folds the blanks into envelopes at a very rapid pace.

Strong glue is also applied to the places which will hold

the envelope together. A weaker glue is applied to the

flap that will be sealed by the consumer. The machine

then folds the blank to form the envelope. The

completed envelopes are filled in cardboard boxes and

shipped to retailers. 
 
 blades into sheets of the

proper size. The sheets are then stacked into large piles

for further cutting. Strong blades then cut the pile of

sheets into blanks. A blank has the shape of an envelope

with its flaps opened and laid flat. Blanks are generally

shaped like diamonds and are cut from the sheets in

such a way as to minimize waste. If the roll is fed

directly into the machine, it cuts the paper into blanks

very quickly with sharp blades.

9 The machine performs all the operations needed to transform blanks into envelopes at a very rapid pace.

Windows are cut if needed. If a transparent covering is

needed for the windows, a strong glue is applied around

them. The transparent material is then cut and glued in

place. Strong glue is also applied to the places that will

hold the envelope together. A weaker glue is applied to

the flap that will be sealed by the consumer. The

machine then folds the blank to form the envelope.

Optional printing or fasteners are applied. The

completed envelopes are filled in cardboard boxes and

shipped to retailers.

Quality Control

Modern envelope manufacturing is highly automated, and

almost always results in a reliable product. Although

constant testing is not necessary, certain factors are checked

to ensure quality. Paper arriving at the factory is inspected to

be sure that it has the correct weight. A very small number of

sample envelopes are checked to ensure that they have the

correct shape and size, and that adhesives have been applied

in the correct places. Any printing that appears on the

envelope must be in the correct position, of the correct color,

and without printing errors. If any windows are cut in the

envelope, they must have the correct dimensions and be in

the correct position.

Packaging Process

The Paper Cup Manufacturing Process Printing Paper arrives in a cup factory on large rolls. One side of the paper

roll is covered with a plastic or wax backing that will eventually

become the inside of the cups. These paper rolls are fed into a

large machine that prints selected designs on the non-coated

side of the paper. After the paper has been printed, the

machine cuts apart the designs on the paper to make small

sheets known as "flats." Each flat will become a cup. Flats vary

in size, depending on the size of the cups being made.
 


Forming After the flats have been stacked, they are fed into one end of a

large machine. This machine rolls the flats into a cylinder and

seals them by heating up the wax coating on the inside of the

paper cups. At the same time, a roll of paper is fed into the

other end of the same machine and circles are cut out of the

paper to form the bottoms of the cups. The strip of paper left

over after the cup bottoms have been cut is sent out for

recycling. The machine brings the cup bottoms and cylinders

together and heat-seals them to each other.
 


Rimming and Packaging The cups are sent through a chute to another machine that rolls

the paper at the top of the cups. This creates a rim on each

cup. The cups are then sent through a vacuum tube to the

packaging department, where they're dropped into tubes that

stack them. Once the desired number of cups is in a stack, the

stack is sent through a machine that wraps plastic around it and

then seals the plastic. The package of cups is then ready to be

packed and shipped. The entire process of making and

packaging cups takes about one minute.
 


Testing Leaks are very rare. However, cups are randomly pulled off of the

production line and checked. The cups that are pulled for

testing are set into a special holder above a mirror. The mirror

allows the person performing the test to see the bottoms of the

cups and make sure they're not leaking. If a leak is found,

production on a particular line is stopped until the problem can

be found and corrected.
 


Timberland’s Balanced Scorecard

Using the following balanced scorecard diagram, provide a least one measure for each of the elements

listed under the four processes.

Cost-Volume-Profit and Sensitivity Analysis

Timberland produces treated wood chips as a by-product of pulp manufacturing. The Company purchases materials (chemicals, etc.) for $32 per ton of chips. Variable costs, including labor, costs $10 per ton. The chips can be sold for $70 per ton. Fixed costs, all unavoidable, equals $84,000. Timberland’s incremental tax rate is 30%.

Required:

1. Prepare a budgeted income statement assuming that Timberland sells 2,500 tons. 2. What is the contribution margin per ton? 3. Calculate breakeven. 4. Assume the Company requires income of $14,000, how much in dollars does Timberland have to sale to achieve $14,000 profit? 5. Now assume the Company wishes to earn $35,711 after tax. What is the target operating income? 6. Next assume the Company now anticipates selling 3,200 tons of chips. Management believes that if $10,000 is invested in advertising the sale of chips will increase to 4,000 tons. Would you recommend the advertising? 7l As an alternative to advertising the factory foreman suggests that if the Company reduces the selling price to $61 per ton sales can be increased to 4,500 tons. Do you recommend the reduction in sales price?

Timberland’s Overhead Allocation Problem

Background

Eastvaco recently purchased a pulp manufacturing company, Timberland, Inc., located in Columbia, South Carolina. Eastvaco’s management is concerned about the current cost structure currently used by Timberland. The pulp industry in general as been on an economic downturn but Timberland has historically shown below average net income and return on equity. Timberland produces four products. Each product is a variation of paper, for instance, difference thickness, color and/or width. Timberland supplies other Eastavco segments, in particular, the Charlotte plant, product A, a key raw material for their manufacturing process. The CEO of Eastvaco has dispatched several accountants from their corporate office to Columbia to review Timberland’s cost allocation structure. Corporate accountants suspect that Timberland’s current overhead allocation, based on multiplying the overhead rate by material costs, is causing an over-allocation of overhead for some products. This leads to inaccurate product profitability analysis. It is believed that product changes and slitting are not being allocated correctly.

The Typical Pulp Manufacturing Process

The manufacturing process begins with timber in the form of logs or wood chips. If raw materials are received in the form of logs, the first step in the process is debarking. A rotating drum that measures 16 feet in diameter by 100 feet in length tumbles the logs to remove the bark. After debarking, chippers reduce the logs into one-inch cubes. Then wood chips are cooked to break down the glue-like material bonding the wood fibers. Chemicals used in the process are reclaimed and reused in future production. Next, the naturally brown fibers are washed and screened. A bleaching process converts brown pulp into white pulp. The paperboard manufacturing process begins by mixing pulp with water and chemicals. The mixture is applied to a porous wire mesh; formation of paper actually occurs within this step. The wire mesh travels through a press that forces the pulp mixture against the wire to eliminate water within the mixture and to form the desired paper thickness. The material then proceeds to a drying section where it travels across numerous cylindrical dryers that are heated with steam. In the final section of the paper machine, long sections of paperboard (approximately five miles long and weighing ten tons) are rolled up into parent rolls and are removed from the machine. The parent roll is further processed by the Company’s customers (including other Eastvaco segments) to make various types of paperboard containers. Sometimes customers require additional processing on parent rolls. For example, food processors often require widths of 18 inches, rather than the standard width of a roll (approximately 12 feet). Thus, rolls are loaded onto a rewinder slitter to produce eight rolls 18 inches wide from one 12-foot-wide roll. The Company had always combined labor and machine costs of the slitter with those of the paper machine for allocation purposes. Thus, all paperboard products shared in the costs of slitting even though most products were not slit. It is now thought that slitting may be more expensive than previously thought. In addition to the costs of specialized equipment and extra labor, knives used in the slitting process often damage the paperboard’s edges. Thus, more quality inspection and testing are required when producing slit rolls.

Timberland’s Cost Allocation Process

The Company had always combined labor and machine costs of the slitter with those of the paper machine for allocation purposes. Thus, all paperboard products shared in the costs of slitting even though most products were not slit. It is now thought that slitting may be more expensive than previously thought. In addition to the costs of specialized equipment and extra labor, knives used in the slitting process often damage the paperboard’s edges. Thus, more quality inspection and testing are required when producing slit rolls.

Continuous processors, such as chemical and paper producers, historically have used volume-related drivers to attach overhead to products. The Company traditionally applied overhead to its products as a function of material costs. Management believed using “material costs” as an allocation base made sense because thicker products required more machine time to process as they demanded slower machine speeds. Additionally, drying time and energy consumption increase with thicker basis weights. (See Table 1 for material costs associated with each product,) Thus, unit level (or volume-related) drivers made sense for applying certain types of overhead to

products. However, other important costs were incurred without respect to volume. For example, product changes induce instabilities into the manufacturing process that result in scrap until the process resumes stability. On average, production engineers estimate that approximately one-half roll is lost to scrap each time a product change is made. Just as discrete-part manufacturers incur machine setup costs between production runs of two different products, scrap produced following product changes is a predictable cost of production. Some of the pulp can be recovered by recycling the scrapped paper, termed “broke” paper. Thus, the product change cost figures presented in Table 2 include only depreciation, labor, energy, and waste materials associated with product changes. Recently, some managers at the company began questioning the long-standing strategic policy of producing a full product line. Because selling prices and profit margins significantly varied across the product mix, some managers questioned whether the company’s assets were being used to the greatest advantage. Currently the Company was experiencing demand in excess of its production capacity. A sample representing significant categories of products is presented in Table 1. The sample contains thin paperboard products(caliper .013) as well as heavier products (caliper .020). In addition, Table 1 identifies whether a given product is coated or uncoated, or slit. The sample is representative of the variation in batch quantities. Some are produced and sold in small quantities, while the market demands significantly more production of other products. Material cost per roll includes pulp and chemical costs, while the selling price reflects recent market prices. Pulp and paperboard is a capital-intensive industry requiring expensive processing equipment. The company cost accountants estimated that manufacturing overhead, including labor, energy, and depreciation on capital equipment, approximates 105% of material costs.

Table 1 Selected production and financial data

Product Thickness Coated/Uncoated Slit Average Rolls per Batch Materials Cost per Roll Selling Price per Roll A .013 Coated Yes 50 $4,800 $12,600 B .014 Uncoated No 2 $5,200 $13,500 C .015 Coated Yes 35 $5,600 $14,200 D .020 Coated No 1 $7,400 $19,500

Table 2 Overhead

Total Depreciation is $800,000 = Product Change **$8,000 + Slitting $70,000 + Net *$722,000 Total Labor is $300,000 = Product Change ** $3,000 + Slitting $25,000 + Net *$272,000 Total Energy is $500,000 = Product Change **$5,000 + Slitting $80,000 + Net * $415,000 Total Other is $198,470 = Product Change **$1,000 + Slitting $20,000 + Net * $177,470 Total Waste is $ 30,000 = Product Change **$30,000 + Slitting -0- + Net -0-

* Net is equal to total amount minus product change cost and minus slitting cost. This amount represents the general overhead, ie. Overhead that is not specific to a particular product.

**Product change is required of all four products and the cost is to be divided equally among the four products. Total product cost is equal to materials, overhead, product cost and where incurred slitting costs.

Requirements

1. Prepare a schedule proving that overhead is currently 105% of material costs. 2. Prepare a schedule showing cost per roll of each of the four products using the 105% overhead rate. 3. As Eastvaco’s cost accountant you believe the general overhead should be allocated separately. Prepare a

schedule showing what you believe the new overhead rate should be. 4. Using the new overhead rate from requirement 3, prepare a schedule calculating the revised cost per roll of

each product. 5. Assuming that the selling price for each product is relatively inelastic, write a short memo to Eastvaco’s CEO

with your conclusions and suggestions.

Target Cost of Proposed New Product Timberland is considering manufacturing special crates to be used for shipping new

mainframe computers. The company is working with a computer manufacturer who is thinking of using the new crates as a standard component for shipping their computers. Timberland's marketing manager has determined that mainframe computer buyers would be willing to pay $110 for a crate. The cost to the computer maker of packaging the mainframe in the new crates is $25. In addition, the computer manufacturer requires a 10 percent return on its cost. The highest net selling price that Timberland can charge the computer maker is $74.

Research conducted jointly by the computer maker and Timberland's marketing personnel shows that customers want six features. These are: (1) durability, (2) ease of packing, (3) protection from damage (4) ease of use (5) compatibility with most brands of mainframes, and (6) ability to reuse the crates.        Based on this research, Timberland's engineers have come up with a design that  uses four main production modules or processes.  Each process has several major sub‐ processes. A list of the major processes, together with preliminary cost estimates  (includes all labor,  material and overhead) for manufacturing or buying each process,  appears in Table 1 below.           In addition to the above, the marketing department estimates that order filling  (primarily order processing and delivery) costs would run $4.00 per unit. General and  administrative costs are expected to be $14.00 a unit.  Timberland expects to earn a 15  percent return on the highest net selling price.     

Table One    Process    Estimated Current Costs    A      $9.50  B      $8.50  C      $8.00  D      $46.00  Total Costs    $72.00      Requirement:  Prepare a schedule showing the target cost and the current cost.  NOTE:  Target cost equals selling price ­ required return of computer company  ­ required return to Timberland.   

Use the Target Cost Worksheet to complete this  assignment. The excel worksheet is included on the CD as  a separate file.