United States

Department of

Agriculture

Forest Service

Northeastern Forest

Experiment Station

Research Paper

NE-559

1985

Low-Cost Opportunity

for Small-Scale Manufacture

of Hardwood Blanks

Bruce G. Hansen

Philip A. Araman
The Authors

Bruce G. Hansen, economist, received a B.S. degree in economics

from Concord College, Athens, West Virginia, in 1968, and a M.B.A. degree

from Virginia Polytechnic Institute and State University in 1978. He is currently engaged in research on analysis of international trade for hardwood

forest products at the Northeastern Forest Experiment Station’s Forestry

Sciences Laboratory, Princeton, West Virginia.

Philip A. Araman is a research forest products technologist at the

Northeastern Station’s Forestry Sciences Laboratory at Princeton, West Virginia. He received a B.S. degree in wood science and technology from

North Carolina State University and a M.S. degree in forest products from

Virginia Polytechnic Institute and State University. He has conducted

studies on the use of hardwood Iumber to make furniture and dimension

stock, and currently is engaged in research on hardwood exports.

Manuscript received for publication

6 August 1984

Abstract

We analyzed the manufacture of standard-size hardwood blanks from

lumber on a relatively small scale by conventional processing. Requiring an

investment of just over $200,000, the conventional mill can process 500 M

bf (thousand board feet) of kiln-dried lumber annually. The study focused

on the economics associated with manufacture of blanks from four

species—northern red oak, black cherry, hard maple, and yellow-poplar.

Assuming a tax rate of 46 percent, returns ranged from 31 percent for hard

maple to 38 percent for yellow-poplar. Plots were developed relating raw

material input cost to blank prices necessary to achieve specified levels of

return.

The blanks investment seems suited to someone wishing to enter the

wood business on a small scale, to sawmill operators wishing to upgrade

and expand their product offering, and to small furniture and cabinet manufacturers wanting more control of their raw material situation.
Introduction

All those in the hardwood

lumber business recognize the

advantages and ready market for

high-quality hardwood lumber. However, nearly 87 percent of all sawlog

timber is Log Grade 2 and below1

(McLintock 1983). As a result, at

least 60 percent of the hardwood

lumber produced is grade No. 2

Common or lower—grades normally

passed over in the manufacture of

furniture and cabinet dimension

stock. Considerable benefit could

result from upgrading some of this

low- and medium-grade material. In

this paper we discuss a low-capitaloutlay manufacturing facility in

which medium (No. 1 Common) and

low (No. 2 Common) grade kiln-dried

lumber is used to make standardsize blanks (Araman 1983)—a

product developed for furniture and

cabinet manufacturers.

Previously we designed and

described the operation of a fullscale hardwood blanks mill (Araman

and Hansen 1983) that is based on

conventional technology. This mill

could profitably convert a log-run

mix of northern red oak lumber into

standard-size hardwood blanks. The

mill described required an initial

investment of about $3 million (1980

dollars) to process 16 M bf

(thousand board feet) of lumber into

9.6 M bf of edge-glued blanks per

shift. By contrast, this study

examines the manufacturing of

blanks on a much smaller scale, and

looks at the manufacture of four

species rather than one. Also, a

schedule of blank prices needed to

achieve specific levels of return for

a broad range of raw material input

cost has been developed.

1 USDA Forest Service grade rules.

Processing System

Table 1 includes a detailed

description of equipment and building costs for the facility (Fig. 1) in

our analysis. Although other

designs are possible, our design

relies on conventional processing

techniques, including crosscutting

first followed by random-width

ripping. The estimated initial capital

cost for the plant facility, including

3 acres of land, is just over

$200,000.

The plant is assumed to

operate one shift, 250 days per

processing 500 M bf of lumber

300 M ft2 (4/4 basis) of red oak,

year,

into

black cherry, or hard maple blanks,

or 325 M ft2 (4/4 basis) of yellowpoplar blanks annually.

The plant employs six people at

a cost of $84,000 annually. This

assumes an hourly rate of $7—$5.40

in wages plus $1.60 in mandatory

fringe benefits. In addition, an

administrative and management

staff of two is allocated $70,000

annually for salaries and office

expenses. Another $20,000 covers

annual costs for utilities, supplies,

and maintenance. Selling expenses

were set equal to 1 percent of gross

revenue.

Table 1.— Facility requirements and estimated

costs for the standard-size

blanks plant

Facility requirements cos t

a

Forklift (2 ton)

Crosscut saw with table

Ripsaw with laser guide light

Abrasive planer (37-inch top machine)

Clamp carrier (8-1/2 feet wide, 20 sections)

Glue pump and applicator

Factory trucks (25)

Compressed air unit

Dust system

Office equipment and furnishings

Land (3 acres)

Building (40 by 85 feet, preengineered,

$15.40/ft 2

Dollars

11,000

9,900

17,600

27,500

16,390

5,060

9,240

5,500

5,500

11,000

33,000

52,360

Total 204,050

a 1980 prices increased by 10 percent,

1
Figure 1.—The blanks manufacturing facility.

Lumber is kiln dried and either

purchased delivered or transferred

at market price from another

division of an ongoing firm and

stored for cut-up in the rough mill.

Lumber is made into edge-glued

panels by a conventional rough

plane, crosscut-rip-salvage rough

mill. After planing, up to 12 standard

lengths are cut at the crosscut saw.

Random-width cuttings are ripped

from the cut-to-length boards.

Pieces containing defects are

salvage crosscut into shorter

standard length cuttings. Clear

cuttings are matched for color and

grain, put into panel sets, and edgeglued. After gluing, blanks are rough

planed and placed into inventory.

Blanks are sold in standard sizes or

they can be remanufactured into

specific size parts.

Raw Material and Product Yields

The following are raw material

and yield assumptions used in the

analyses.

● Only 4/4 lumber is used.

● The grade mix of lumber used in

manufacturing blanks consists of

60 percent No. 1 Common and 40

percent No. 2 or No. 2A Common.

● Costs for red oak, black cherry,

hard maple, and yellow-poplar

were obtained for 4/4 No. 1 Common and No. 2 or No. 2A Common

from the April 7, 1984, Hardwood

Market Report. Additional charges

were added for kiln drying and

transportation in deriving input

cost per M bf at the mill.

Prices

Red oak 615 255 470 100 40 610

Black cherry 605 305 485 75 40 600

Hard maple 342 215 290 100 40 430

Yellow-poplar 260 170 225 65 40 330

2
Economics

● A 60-percent yield in blanks was

assumed for red oak, black cherry,

and hard maple. Yellow-poplar was

assumed to have a 65-percent

yield. Yield assumptions were calculated using FPL-118 (Englerth

and Schumann 1966) yield tables,

and by adjusting these to allow for

a 6-percent lumber shrinkage, a

60/40 lumber grade mix, and

standard-blank size requirements.

These requirements were determined after an extensive survey of

manufacturers of solid furniture

and kitchen cabinets (Araman et

al. 1982). Although thousands of

different part sizes were reported

in the survey, it was found that

relatively few standard blank sizes

could meet the industries’ varied

requirements.

● The standard blanks are Cl F

(clear-one-face), 7/8 inch thick, and

26 inches wide (edge-glued) with

lengths predominantly between 15

and 40 inches, though some are

as long as 100 inches. Market

price assumptions for blanks were

developed from estimates of edgeglued product prices obtained

from conversation with dimension

manufacturers since market price

reports for panel products are not

available. The prices used in this

analysis were:

Species DollarslM ft2

Red oak 2300

Black cherry 2300

Hard maple 1900

Yellow-poplar 1700

The economic discussion revenues) throughout the entire life

focuses on construction of the net of the investment, giving explicit

present value (NPV) and internal recognition to the timing of cash

rate of return (l RR) discounted cash flows, foregone opportunities, and

flow measures. These measures capital costs.

best account for the relationship

among cash flows (that is, the initial Table 2 provides summaries of

investment, operating costs, and the cash flows expected during the

Table 2.—Cash flow summaries for red oak, black

cherry, hard maple, and yellow-poplar

(tax rates of 30 and 46 percent)

Facilities Net after-tax

and working cash flow

capital Gross Operating DepreciYear investment revenues costs ation 30% 46%

-----------------------------Thousands of dollars----------------------------

RED OAK

o

1

2

3

4

5

6

7-9

10

0

2

3

4

5

6

7-9

10

1

0

1

2

3

4-5

6

7-9

10

0

3

4-5

6

7-9

10

243

18

243

18

238

13

235

10

345

690

690

690

690

690

690

690

330

486

486

486

486

486

486

486

345

690

690

690

690

690

690

690

BLACK CHERRY

327

481

481

481

481

481

481

481

HARD MAPLE

285 284

570 395

570 395

570 395

570 395

570 395

570 395

YELLOW-POPLAR

1

2

275 259

22

33

32

27

27

4

3

3

– 243 – 243

— 1 0

153 126

152 125

151 123

151 122

144 112

144 112

248 216

– 243 – 243

22 1 2

33 156 128

32 156 127

27 155 125

27 154 125

4 147 115

3 147 114

3 251 218

– 238 – 238

22–6– 2

33 133 110

32 132 109

27 131 107

4 124 96

3 124 96

3 217 190

– 235 – 235

22 8 9

553 345 33 156 128

553 345 32 155 127

553 345 27 154 125

553 345 4 147 114

553 345 3 147 114

553 345 3 234 201

3
10-year investment period for each

of the four species. In all examples,

full production is not achieved until

the second year of operation, so

revenues in year 1 are half those

thereafter. Except for raw material

costs and selling expenses, however, first-year costs equal those

under full production.

The derivation of the net aftertax cash flows in most years is

straightforward. To begin, operating

costs and depreciation were subtracted from revenues, taxes were

computed, and then depreciation

was added to the after-tax income.

However, there are instances where

other considerations affect the net

after-tax cash flows. First, as the

plant moves to full production in

year 2, additional working capital is

required. Harpole’s (1978) program

increases working capital automatically using the relationship between

initial working capital outlays and

operating costs. Second, the program allows for complete writeoff of

depreciation in the year it occurs

whether or not there is sufficient

income from the project itself. In

such instances, it is implicitly

assumed that there is additional

income for the investor, allowing

the complete and immediate writeoff to occur. This treatment

enhances the net after-tax cash flow

only to the extent of the tax benefit

derived from depreciation. Third,

proceeds from the assumed sale of

land and from real assets in an

amount equal to their remaining

book value, plus the return of working capital, are added to the operating cash flows at the end of year 10.

Depreciation allowances were

calculated using Accelerated Cost

Recovery System schedules.

Accordingly, building expenditures

were depreciated over 15 years; all

equipment, with the exception of 25

factory trucks, in 5 years; and the 25

factory trucks in 3 years. In keeping

with general practice, assets not

fully depreciated in 10 years are

assumed to be sold at the end of

the tenth year at a price equal to

their remaining book value. investment tax credits were not

considered.

In discounted cash flow analyses, initial working capital outlays

are a part of the initial investment.

Subsequent outlays are thought to

derive from after-tax cash flows in

the year preceding their use. These

outlays are required to cover

expenditures for raw material, work

in process, finished goods inventories, and to cover sales where

credit terms are extended to the

buyer. We allow for working capital

to cover approximately 10 days’

inventory of raw material plus 25

days’ output of finished product.

Working capital requirements vary

in relation to the value of the species being manufactured.

While individual investor circumstances, capital costs, tax rates,

and alternative investment opportunities will ultimately dictate

investment decisions, our results

indicate that the blanks manufacturing option for small-scale investment should be of considerable

interest. Assuming that the corporate maximum tax rate of 46 percent

applies, investment performance

after taxes as measured by the IRR

ranged from a low of 31 percent for

the manufacture of hard maple

blanks to a high of 38 percent for

the manufacture of yellow-poplar

blanks. The NPV, given a discount

rate of 15 percent, ranged from

$213,000 to $298,000 for hard maple

and yellow-poplar, respectively.

For those whose effective tax

rate lies below 46 percent, the returns are even better. For instance,

given a tax rate of 30 percent, the

IRR ranged from 37 percent to 45

percent. Corresponding improvement in the NPV also is evident.

Table 3 contains performance measures for all species assuming effective tax rates of 46 and 30 percent.

Table 3.—internal rate of return (lRR) and net present

value (NPV) for blanks manufacture of

selected species assuming effective

tax rates of 46 and 30 percent

Tax rate

Species 46 percent 30 percent

IRR NPV IRR NPV

Thousands Thousands

Percent of dollars Percent of dollars

Red oak 35 277 42 399

Black cherry 36 290 43 415

Hard maple 31 213 37 314

Yellow-poplar 38 298 45 422

4
Raw Material Cost/Blank Price

Relationship

To this point our efforts have

focused on evaluating performance

for specific species. While investment seems quite promising, these

analyses have failed to provide

information as to the potential

return for still other species or for

changes in the relationship between

the cost and price for the species

already investigated. Recognizing

this, we have plotted “generic”

cost/price relationships, for 20-, 30-,

and 40-percent return on investment. Plots have been constructed

for tax rates of 30 and 46 percent

(Figs. 2-3). The cost/price plots

account for raw material costs from

$200/M bf to $1,000/M bf and for

blank prices ranging from about

$1,200/M ft2 to about $3,200/M ft2

.

Figure 2.—Cost/price relationship for a

20-, 30-, and 40-percent return on investment (tax rate = 30 percent).

Figure 3.—Cost/price relationship for a

20-,30-, and 40-percent return on investment (tax rate = 46 percent).

5
These plots can be used to

evaluate the price of blanks necessary to earn a particular return given

a certain cost for lumber. For example, using Figure 3, a 20-percent

return could be earned given an

input material cost of $600 if blanks

were priced at $2,000/M ft2

. To

achieve a 40-percent return, the

price would need to be increased

about $400 to about $2,400/M ft2

.

The plots can be used in still

another situation. That is, where the

price for blanks is given and an

investor wishes to know what he

can pay for raw material and still

achieve a desired level of return.

Returning to Figure 3, it can be

seen that a blanks’ price of $2,600/M

ft2 would allow about $710IM bf to

be paid for raw material if a return

of 40 percent is to be made. If a 20-

percent return were acceptable, the

price paid for raw material could be

increased about $230/M bf to

$940/M bf.

Discussion and Conclusion

While the plant described

would be attractive in allowing

someone not otherwise in the wood

business to enter the wood business on a small scale and then

possibly expand, it seems particularly suited for investment by sawmill operators. Small furniture and

cabinet manufacturers, too, would

realize several benefits by including

blanks manufacture in their operations.

Sawmillers would benefit by

having a means to use some of their

medium- and low-grade lumber (No.

1 and No. 2 Common) in the manufacture of a higher valued product.

Too, they would put more value

added into their expanded product

offering. Since FAS (Firsts and Seconds) or Select grade material is not

needed, these grades would still be

available to command the highest

premium the market has to offer.

Small furniture and cabinet

manufacturers either producing or

purchasing blanks would be better

able to control their raw material

situation. Since production often is

on a job-shop basis, few parts of

any one size are ordinarily required

at one time. Because panels can be

inventoried and parts cut to size

almost immediately, blanks seem

ideally suited to the job-shop environment. Additionally, this group

would enjoy the same advantages

enjoyed by the sawmiller in being

able to use more No. 2 Common

than is customary in the production

of fine furniture.

Literature Cited

Araman, Philip A. Standard-size

blanks for furniture and cabinets.

NE-INF-45-83. Broomall, PA: U.S.

Department of Agriculture, Forest

Service, Northeastern Forest

Experiment Station; 1983.7 p.

Araman, Philip A.; Gatchell, Charles

J.; Reynolds, Hugh W. Meeting

the solid wood needs of the furniture and cabinet industries:

standard-size hardwood blanks.

Res. Pap. NE-494. Broomall,

PA: U.S. Department of Agriculture, Forest Service, Northeastern

Forest Experiment Station; 1982.

27 p.

Araman, Philip A.; Hansen, Bruce G.

Conventional processing of

standard-size edge-glued blanks

for furniture and cabinet parts: a

feasibility study. Res. Pap.

NE-524. Broomall, PA: U.S.

Department of Agriculture, Forest

Service, Northeastern Forest

Experiment Station; 1983.11 p.

Englerth, George H; Schumann,

David R. Charts for calculating

dimension yields from hard maple

lumber. Res. Pap. FPL-118. Madison, Wl: U.S. Department of Agriculture, Forest Service, Forest

Products Laboratory; 1969.12 p.

Harpole, George B. A cash flow

analysis computer program to

analyze investment opportunities

in wood products manufacturing.

Res. Pap. FPL-305. Madison,

Wl: U.S. Department of Agriculture, Forest Service, Forest Products Laboratory; 1978.24 p.

Lemsky, Abe, ed. Hardwood market

report. 62(14):4; 1984.

McLintock, Thomas F. The

resource: nationwide perspective.

In: America’s hardwood forests—opportunities unlimited.

Proceedings of the 1982 Convention of the Society of American

Foresters; 1982 September 19-22;

Cincinnati, Ohio; 1983: 6-10.

6
Hansen, Bruce G.; Araman, Philip A. Low-cost opportunity for

small-scale manufacture of hardwood blanks. Res. Pap.

NE-559. Broomall, PA: U.S. Department of Agriculture, Forest Service, Northeastern Forest Experiment Station; 1985.

6 p.

Discusses the economics associated with the small-scale

manufacture of blanks from four species—red oak, black

cherry, hard maple, and yellow-poplar. Assuming a tax rate of

46 percent, returns ranged from 31 percent for hard maple to

38 percent for yellow-poplar. Plots were developed relating

raw material input cost to blank prices necessary to achieve

specified levels of return.

ODC: 672: 832.1: 836.1

Keywords: Sawmill, furniture dimension, investment analysis,

discounted cash flow

*U.S. GOVERNMENT PRINTING OFFICE: 1985-505 -028:20004
Headquarters of the Northeastern Forest Experiment Station are in

Broomall, Pa. Field laboratories are maintained at:

● Amherst, Massachusetts, in cooperation with the University of

Massachusetts.

● Berea, Kentucky, in cooperation with Berea College.

● Burlington, Vermont, in cooperation with the University of

Vermont.

● Delaware, Ohio.

● Durham, New Hampshire, in cooperation with the University of

New Hampshire.

● Hamden Connecticut, in cooperation with Yale University.

● Morgantown, West Virginia, in cooperation with West Virginia

University, Morgantown.

● Orono, Maine, in cooperation with the University of Maine,

Orono.

● Parsons, West Virginia.

● Princeton, West Virginia.

● Syracuse, New York, in cooperation with the State University of

New York College of Environmental Sciences and Forestry at

Syracuse University, Syracuse.

● University park, Pennsylvania, in cooperation with the

Pennsylvania State University.

● Warren, Pennsylvania.