Oct 17 06 11:02a pa FINEPRINT COMPANY (4), (B), and (C) CASE SUMMARY Joka Johnson, owner of FinePrint Company, is presented with several opportunities to consider: (1) whether fo accept a one-time special printing order (the A case), (2) whether to outsource some of bis printing (© another printing company (the B case), and (3) whether to accept the one-time special and outsource it to another printing company (the C case), In making his decision, he mast conside! relevance of certain costs?the behavior of those costs, anthe extent to which he has capacity constraints. ‘TEACHING OBJECTIVES This case series is a short, simple introduction to the basics of costs and decision making, exposing students to the following: ‘Cost behavior, including variable and fixed costs; ‘The concepts of contribution margin and breakeven; ‘The relevance of costs to decision making; Opportunity costs; and “The impact of capacity constraints on decision making. ‘The three cases can be taught together in one 85-minute class session. Alternatively, the instructor may choose to use either the A or B case independently as part of a class that includes other material. SUGGESTED STUDENT ASSIGNMENT =, Whet deed your “gut” tell you > “The A case . oe “2 Ls there a decision ruta of thew{.” ! |. FinePrint currently is operating at around full capacity: 150,000 brochures. Should Johnson accept the special order? 2, Assume that montily printing capacity is 200,000 brochures, current monthly production is 150,000 brochures, and operating costs at the 150,000 level are as presented in case Exbibit 1. Also assume that this order would not affect amy of FinePrint’s current business with its regular ‘customers, Should Jolson scoept the special order? The B case ‘Should FinePrint outsource 30,000 brochures to SmaliPrint? 18Oct 17 06 11:02a pe ‘The C case If FinePrint could print the special order for Jenkins, should FinePrint outsource 25,00 brochures to SmallPrint? ANALYSIS The A case ~ ‘Variable and fixed costs per unit (or per 100 brochures) at the curreat monthly production level of 150,000 brochures can be determined from the data ia case Exhibit 1, as follows: Cost per Montiily costs 100 ‘at 150,000 brochures yolume Manufacturing costs Direct material, variable 34.00 $6,000 Direct labor, variable 1.00 1,500 Direct labor, fixed 2.00 3,000 ‘Manufacturing overhead, variable 1.00 1,500 Manufacturing overbead, fixed —225 3375 Total manufacturing costs $10.25 515,375 Nonmanufacturing costs: Marketing, vatiable $1.00 31,500 Marketing, fixed 125 175 Corporate, fixed 250 3.750 Total nonmanufacturing costs 5475 $7,128 Total costs $15.00 322,500 Variable manufacturing costs per unit $6.00 Variable nonmanufactuting costs per unit 1.00 ced manufacturing costs per unit 428 ced noumanufactuting costs per unit $3.75 CG) sea Johnson accept the special order? Should Johnson accept the special order? “The following enelysis quantifies the impact of accepting the special order on revenues and costs of FinePrint. Alternative 1: Do not accept special order; use the 25,000 capacity to produce uotmat brochures (status que). Altemative 2: Accept special order; produce 25,000 special-order and 125,000 normal brochures. 19Oct 17 06 11:03a ps Total ‘Total The 25,000] The 25,000 tats 4.3) eis Atematve | Atematve | Difzence aterate | Akematne | Difteense 1 i t i Fea 5500 SRT RETRO TT Vibe cone: i 1 irect material, variable 6,000 6,000 } 1,000 1,000 ect labor, variable 1,500 1,500 {0 | 380 Micunaregowencad, | 1300 | 1300 20 30 varie Nat, variable um | ign | 2s 2 | as son vasa coe ws | unas | 20 m| # Contibuion magi rsaoo | 13500 | casa | 2300 | p00 | 0 [ Fixed costs: | Diet bo fed so00 | 300 Manctewropowtae, ars | ass es Marteting, ed rans | 189s Corpor Exe xo | 30 “wal ad cos Be | ae Orening mone sagen | staan [scat | sin | sia | 209 Johnson should not accept the special order. Income would be $1,500 lower if FinePrint accepts the special order. (It should be noted that because this is a one-time special order, FinePrint should make this decision considering much more than just the one-time financial impact. The implications for regular customers are likely the driving force behind this particular decision.) Alternatively, we could approsch the analysis in the following way. FinePrint as no excess capacity, so printing. capacity is a constrained resource. FinePrint should choose the brochures with the greatest contribution margin Contribution margin per 100 brochures: Current work ‘Special order Revenues $17.00 $10.00 @.SO Variable casts: Direct material, variable $4.00 $4.00 Direct labor, variable 1.00 ‘Manufacturing overhead, variable . 1.00 ‘Marketing, variable $1.00 a ‘Total variable costs $7.00 36.00 Contribution margin 810.00 $4.00 FinePrint should not accept the special order. It has a contribution margin of $4.00 per 100 brochures versus $10.00 per 100 brochures for the current work. 20Oct 17 06 11:03a pa |,ssume that monthly printing cepacity is 200,000 brochures, current monthly production is 150,000 brochures, and operating costs at the 150,000 level are as presented in case Exhibit 1 ‘Also assurme that this order would not affect any of FinePriat’s current business with its regular ‘customers. Should Johnson accept the special order? ‘Altemative 1: Do not accept special order; produce only 150,000 brochures (status quo). ‘Altemative 2: Accept special order; produce 175,000 brochures. Fou! {Tout | Tees DO0 | The 75000 |] 4 Get A) atemaine | Dittence? erale | Alemaive | Diteeace - 1] 2 rj 2 ri $25,500 $28,000 $2,500 ‘go $2,500 | $2,300 wiles wie | amo | 7a | cg | @ | 1900 | 0) Beemer eee | ee ios | “ass |e we | Cae | ‘Manufacturing overhead, 1,500, 1,750 (250) o 1 250 (250) vente wee vedas |_.smo uso of Total variable costs: 10,500, 12,000 _{1,500) o 1,500 1,500) cots mga 1sq0 160001000 | a) tm Fed coe Direct labor, fixed 3,000 | 3,000 1 Vinaiherap bead, | 3318 | | an | i eta fed Las Capone acs 38 relate dime | Opening nome ssom | sso | stom | so | siamo | sto | | FinePrint should accept the special order. It generates additional income of $1,000, Note that students might be tempted to dectine the special order because they obscrve either that (2) the $10 price is less than the $15 total cost per 100 brochures or (2) the S10 price is less than the $10.25 manufecturing cost per 100 brochures, Tut because the inorementel profit at $1,000 is greater than zero, FinePrint should accept the order. ‘The instructor may consider posing the following additional questions: stots rnin ace te oder $630 Wee 9.5015 esta he $7.0 vail co per 100 Brochures for the current work, some students will say that FinePrint should not accept the onfer. But there are no variable marketing costs for the order, so the variable cost per 100 brochures for the ‘otder is $6.00. Thus, FinePrint should accept the erder even at $6.50. @ sevtat price wautd FinePrint be ndiferen bout accepting the order? $1,500 additional costs pet 100 Brochures/(25,000/100) units of 100 brochures = $6.00. (Tihis is equivalent to the $6.00 variable cost per 100 brochures for the order.)Oct 17 06 11:04a ‘The B case should FinePrint outsource 20,000 brochures to SmallPrint? Aktemative 1: Do not outsource 30,000 brochures (status quo). Altemative 2: Outsource 30,000 brocinares. po “Aaa Total The 30,000{ The 30,000 tus quo] © ‘Aliemative } Altemative | Difference | Allemaitve | Akemative } Difference 1 2 1 z Revenues 550 | S5.500 30 | $5,100 35,106 0 Variable cots: Direct material, variable 6,000 —y 4,800 1200] 1,200» 1,200 Direct labor, variable 4,500 —s 1,200 300 300 yo "300 Manufacturing overhead, 1300 > 1200 | 300 300 Ly» 0 300 variable | Marketing, variable 1,500 1,500 0 300 300 o Cost to eusource 9 > 23490 | 400, oy 2400 | (400) Total variable costs 10.500 inteo 600 2100 2.700 00) Contribution margin 15,000 —» 14,400 (| 3,000 +> 2,400 (600) Fixed coats Diet labor, fixed 3,000 | 3,000 Manufacturing overhead, 3375 | 3395 fined Marketing, fixed 17 | 1,875 Corporate fixed 3.750 3750 Total fixed Costs T.000 12,000 Operating income 3,000 | $2,400 | — si6co) | $3,000 $2,400 +5(600) FinePrint should not outsource the 36,000 brochwes. Outsourcing would cost $600 more than not outsourcing. Note that the $8.00 offer from SmallPrint is less than FinePrint’s $10.25 total manufacturing costs por unit, so some students might be tempted to favor outsourcing. But the $8 offer is more than FinePrint's $6 variable manufacturing costs, soit is cheaper for FinePrint to print the brochures itself. © teceae 1f FinePrint could print the special order for Jenkins, should FinePrint outsource 25,000 brochur. ‘Alternative 1: Do not accept the special order and do not outsource (status quo). Alternative 2: Accey the special order for 23,000 and outsource 25,000 (produce 150,000, outsource an additional 25,000 at $8 per 100, sell 130,000 at $17 per 100. sell 25,000 at $10 per 100) 2Oct 17 06 11:04a po Att: Sts aT aeept Spook ) od ard outsource - Ce) cose. — Tout] Total Tag 25,000 | The 75,000 Giosus i fotoches ‘cmaite | Allemaive | Dixons | Atermeite | aleralve | Ditton 1 1 2 a 2 Revenues TE Sod SRG S550 50 ty 500 | 505 Warable cos Direct material variable 6.000 ° ict aber, variable 1500 ° Monufacturing overicad, 1300 ° viable ~ Markesing, variable 1.500 o | Cost to ousource a+> ote 12.000) Total variable costs i000 0 | 2.000 | contribution margin | ts.000 4 0 La 500 soo Fixed cos: | Diroo bo, fixed 3,000 | 3,000 Manufacturing overhead, 3,375 3,375 | fice | Marketing, tae agi | 1,875 | Comporae, fined 3790 | 3.750 | “Toa Exea Goss Taw | zo - _ | Opersting income ote so | 00 so sso | 00 FinePrint should outsource and take the special order, which would generate $500 of additienal operating income, Note that this is the same as adding the $1,000 relevant profit from the special-order analysis in the A case 10 the $1,500 costs in the “Make” column from the outsourcing analysis in the B case. (The $31,000 profit from the special order is an opportunity cost—it is profit forgone by not outsourcing )