COLORSCOPE, INC.

CASE STUDY PRESENTATION BY GROUP 2

INTRODUCTION

Colorscope, Inc. is seeking ways to compete in an increasingly intense competitive environment in pre-press printing.
The external environment has changed with the advent of new technology, and new players entering the market has
increased the supply side of the industry. COLORSCOPE needs change in its operation, marketing and cost strategy.

Direct Competition -
 New technology is eroding quality-based competitive advantage
 New technology is cheaper and is lowering entry barrier
 Intense competition from :
 Large tech-savvy printing companies such as R. R. Donnelley & Sons Co., Quad Graphics, etc. which had integrated backward into pre-
press services.
 Horizontal integrated national pre-press houses or “trade-shops” such as American Color and Wace/Techtron
 Small stand-alone firms
INTRODUCTION CONTINUED..
The impact of increased competition led Colorscope to lower their selling prices to keep up with market
demands. As we can see in below graph, while the smaller firms were increasing their selling price Colorscope had
to decrease their selling significantly.

1200
Price Trend of Colorscope from 1991 to 1995
1000

800

600

400

200

0
1991 1992 1993 1994 1995

Colorscope Service-Bureau
PRE-PRESS PRODUCTION PROCESS

Job Quality
Scanning Assembly Output
Preparation Control

These are the major stages in the production process, and hours are not clocked in these departments in
fixed proportions.
TWO STAGE COST SYSTEM
We first allocate overhead to the cost pools (the 5 departments), and then allocate overhead from the pools to the jobs
 First Stage: tracing costs to different production centers.
 Wages are already tracked by department (Exhibit-11)
 Equipment depreciation is also tracked by department
 Rent can be allocated to the departments (using floor space)
 Other overheads needs to be allocated to the departments (we can use labor hours as the allocation base)
 Second Stage: Assigning the production center costs to jobs
 Cost of resources: wages, depreciation, rent
 Resources: labor, machinery and space
 Resource Drivers used in assigning cost of resources to cost pools: square feet for allocating Rent to production centers such as
Job Preparation, Scanning and Assembly
 OVERHEAD DRIVER RATE CALCULATION

Description Job Preparation Scanning Assembly Output Quality Control Idle Total

Wages $8,000 $32,000 $64,000 $10,000 $11,000 $1,25,000

Depreciation $500 $25,000 $10,000 $14,000 $500 $50,000

2,000 2,000 8,000 4,000 1,000 13,000

Rent [{1000/15000} [{1000/15000} [{4000/ 15000} [{2000/ 15000} [{500/ 15000} [{6500/ 15000} $30,000

*30000] *30000] *30000] *30000] *30000] *30000]

1,311 5,246 10,492 1,639 1,311
Others $20000
[160/2440]* 20,000 [640/2440]* 20,000 [1280/2440]*20,000 [200/2440]*20,000 [160/2440]* 20,000
Total Overhead (A) $11,811 $64,246 $92,492 $29,639 $13,811 $13,000 $2,25,000

Labour Hour (B) 160 640 1280 200 160

Overhead Rate per

$73.82 $100.38 $72.26 $148.20 $86.32
labour hr (A/B)

Floor Space in sq. ft. 1000 1000 4000 2000 500 6,500 15,000

(From Exhibit 11 and 9)

 JOB PROFITABILITY ANALYSIS
Job profitability can be calculated as : Revenue – Total Costs(Direct costs – Allocated overheads)

Job Quality Net profit

Revenue Gross Margin (1-2) Scanning Assembly Output
Job # Customer # Pages Materials (2) Preparation Control (A – B – C – D
(1) (A) (C) (D) (E)
(B) (F) –E–F)

61001 10 16 $9,600.00 $5,400.00 $4,200.00 $295.28 $3,212.30 $3,034.89 $1,185.56 $604.23 -$4,132.26
61002 10 16 $9,600.00 $3,500.00 $6,100.00 $221.46 $2,409.23 $2,745.86 $1,185.56 $690.55 -$1,152.65
61003 10 32 $23,000.00 $4,500.00 $18,500.00 $516.73 $4,015.38 $5,419.45 $2,371.12 $690.55 $5,486.77
61101 11 16 $12,000.00 $1,800.00 $10,200.00 $295.28 $1,606.15 $2,167.78 $592.78 $345.28 $5,192.74
61102 11 16 $11,000.00 $1,500.00 $9,500.00 $295.28 $1,606.15 $2,023.26 $592.78 $345.28 $4,637.26
61201 12 16 $11,000.00 $1,500.00 $9,500.00 $295.28 $1,606.15 $2,312.30 $592.78 $517.91 $4,175.58
61202 12 32 $23,000.00 $3,300.00 $19,700.00 $516.73 $3,212.30 $4,191.04 $1,185.56 $431.59 $10,162.77
61203 12 32 $22,000.00 $3,400.00 $18,600.00 $442.91 $3,413.07 $4,624.60 $1,185.56 $517.91 $8,415.95
61204 12 32 $20,000.00 $3,200.00 $16,800.00 $442.91 $3,011.53 $4,191.04 $1,185.56 $690.55 $7,278.40
61301 13 128 $50,000.00 $13,000.00 $37,000.00 $1,107.28 $13,049.97 $18,064.84 $4,742.24 $2,589.56 -$2,553.90
61401 14 16 $7,800.00 $1,800.00 $6,000.00 $369.09 $1,405.38 $2,312.30 $592.78 $345.28 $975.17
61402 14 16 $8,000.00 $3,100.00 $4,900.00 $295.28 $1,907.30 $2,312.30 $1,185.56 $604.23 -$1,404.67
61403 14 16 $8,000.00 $3,900.00 $4,100.00 $295.28 $2,007.69 $2,456.82 $592.78 $258.96 -$1,511.52
61404 14 16 $9,000.00 $2,100.00 $6,900.00 $295.28 $2,208.46 $2,601.34 $592.78 $431.59 $770.56
61405 14 16 $9,800.00 $2,000.00 $7,800.00 $295.28 $2,007.69 $2,601.34 $592.78 $345.28 $1,957.65
(From Exhibit 8, 9 and 12; each production centre cost is calculated by multiplying hours to the OH rate )
 JOB PROFITABILITY ANALYSIS CONTINUED…
Processing centre cost = (hours x overhead rate)
Job Quality Net profit
Customer Gross Margin (1-2) Scanning Assembly Output
Job # Pages Revenue (1) Materials (2) Preparation Control (A – B – C – D
# (A) (C) (D) (E)
(B) (F) –E–F)

61405 14 16 $9,800.00 $2,000.00 $7,800.00 $295.28 $2,007.69 $2,601.34 $592.78 $345.28 $1,957.65
61501 15 16 $11,000.00 $2,200.00 $8,800.00 $295.28 $2,108.07 $2,818.12 $592.78 $345.28 $2,640.48
61502 15 16 $11,000.00 $3,600.00 $7,400.00 $295.28 $2,007.69 $2,890.38 $1,185.56 $604.23 $416.87
61601 16 32 $20,000.00 $3,300.00 $16,700.00 $516.73 $2,609.99 $4,335.56 $1,185.56 $776.87 $7,275.28
61602 16 4 $2,000.00 $600.00 $1,400.00 $147.64 $501.92 $722.59 $148.20 $86.32 -$206.67
61603 16 4 $1,400.00 $1,000.00 $400.00 $147.64 $501.92 $794.85 $296.39 $86.32 -$1,427.12
61701 17 16 $8,000.00 $2,100.00 $5,900.00 $295.28 $2,007.69 $2,818.12 $592.78 $258.96 -$72.81
61702 17 16 $10,000.00 $2,500.00 $7,500.00 $295.28 $2,007.69 $2,962.63 $592.78 $431.59 $1,210.03
61801 18 4 $4,000.00 $1,600.00 $2,400.00 $73.82 $501.92 $794.85 $296.39 $86.32 $646.70
61901 19 4 $2,000.00 $1,700.00 $300.00 $147.64 $501.92 $867.11 $148.20 $86.32 -$1,451.19
61902 19 16 $12,000.00 $2,200.00 $9,800.00 $369.09 $1,907.30 $3,034.89 $592.78 $431.59 $3,464.34
62001 20 1 $0.00 $200.00 -$200.00 $73.82 $100.38 $144.52 $148.20 $86.32 -$753.24
Total 545 $3,15,200.00 $75,000.00 $2,40,200.00 $8,636.79 $61,435.24 $83,242.80 $24,155.79 $12,688.86 $50,040.53

Cost of Idle Time $3,174.21 $2,810.76 $9,249.20 $5,483.22 $1,122.14 $21,839.53

Total $11,811.00 $64,246.00 $92,492.00 $29,639.00 $13,811.00 $28,201.00

Rent on unused
$13,000.00
Floor Space

Net Profit $15,201.00

(From Exhibit 8, 9 and 12; each production centre cost is calculated by multiplying hours to the OH rate )
CUSTOMER PROFITABILITY ANALYSIS

Customer # Total
10 $201.86
11 $9,830.00
12 $30,032.70
13 -$2,553.90
14 $787.19
15 $3,057.35
16 $5,641.50
17 $1,137.22
18 $646.70
19 $2,013.15
20 -$753.24
Grand Total $50,040.53
INFERENCES
 10 out of 26 jobs lost money, totaling to $14,666
 16 out of 26 jobs made money, totaling to $35,375
 On the whole, Colorscope made $15,200
 Idle time cost Colorscope $21,840
 $13,000 in unused floor space
 Cost of excess capacity should not be allocated to jobs and is identified as a separate line item
 Excess capacity is inevitable and may be desirable as it allows the company to respond to sudden
additional orders for which Coloscope can charge a price premium
 Colorscope has excess capacity at 2 levels :
 Floor space
 Cost pool level
INFERENCES CONTINUED…

 Customers with highest Net Profit :

 Customer # 12 with a Net Profit of $30,003
 Customer # 11 with a Net Profit of $ 9,830
 Customer # 16 with a Net Profit of $ 5,641

 Customers with loss:

 Customer # 13 with a Net loss of $2,554
 Customer # 20 with a Net loss of $753
REWORK COST AND IMPACTS ON PROFIT
Rework reduces profit by $27,519

Customer Inhouse Customer Inhouse

Total Cost of Total Cost of
Job Initiated Rework Correction Cost - Initiated Rework Correction Cost - Net Extra Cost
Cusomer Rework House Error
Cost - Material Material Cost - Labour Labour
61001 2,700 0 3094.16125 5,794 0 5,794
61002 1,100 0 2088.3675 3,188 0 3,188
61301 1,000 1,000 1841.180625 898.5231 2,841 1,899 4,740
61402 0 1,000 2528.637 0 3,529 3,529
61403 0 1,000 2398.184 0 3,398 3,398
61502 1,500 0 1201.62625 2,702 0 2,702
61603 0 500 739.945 0 1,240 1,240
61801 1,000 0 465.3575 1,465 0 1,465
61901 1,000 0 463.240625 1,463 0 1,463
Total 8,300 3,500 9,154 6,565 17,454 10,065 27,519
WHALE CURVE

Whale Curve Customer Profit Cumulative

60000
Customer 12 $30,032.70 30032.7025
50000 Customer 11 $9,830.00 39862.6988
Cumulative Profits

40000 Customer 16 $5,641.50 45504.1944

30000 Customer 15 $3,057.35 48561.5481

20000 Customer 19 $2,013.15 50574.6981

Customer 17 $1,137.22 51711.9131

10000

Customer 14 $787.19 52499.0988

0
Customer 18 $646.70 53145.7963

Customer 10 $201.86 53347.6594

Cutomers
Customer 20 -$753.24 52594.4238

Customer 13 -$2,553.90 50040.5275

IS FULL COST THE RIGHT METRIC?

 Allocation of full cost to Jobs assumes that

 All costs are variable in the long run
 For non-repetitive businesses, companies should take jobs that cover the variable costs
 For repetitive businesses selling price should also cover all overhead costs
COST-QUALITY TRADE-OFF

 Share rework costs with customers

 Reduce in-house errors
 If scanning is poor; the scanning assembly work need to be redone
 So as soon as scanning is done, it can be sent to quality control for detecting the errors in scanning
 If no error, the job can be sent to assembly
 Restructure production sequence to reduce rework
 prep -> scanning -> QC -> assembly -> output -> QC
CHANGE REQUIRED IN THE INCENTIVE SYSTEM

 Currently employees are paid on a hourly wage rate

 Employees may prefer hourly wages as it may remunerate them on a higher side

 Share the gains with employees by eliminating rework