Colorscope

Case Discussion
 Colorscope
Who is Andrew Cha?
What did colorscope do?
What were the trends in the
industry?
What was the significance of March
1996?
 Colorscope
When was it founded?
What was its sales in 1988?
Name some of its big size clients
What happened in 1988? What was the size of
the acquirer? What was the price offered?
What were the rationale behind this
acquisition move?
What was chas stand on this offer?
 Colorscope
What was the impact of cheaper pc and Mac-
based microcomputers?
Did it affect colorscope?
What happened in 1990? What was the
impact on colorscope?
What happened in 1994? What did Cha want
to do for this?
 The Pre-Press Production Process
How technology had changed the prepress
process?
- Time taken for conventional design and layout
- Time taken for Photography
- Time taken for pre-press layout and proofing
- Printing
- Clients
 Industry Dynamics
What was the market size for printing in
1995?
What was the nature of competition?
What was the share of pre-press costs in the
price charged by printers to their clients?
What was the size of the US pre-press
market?
Why were there downward trend in prices in
the pre-press industry?
 Direct Competition
What were the types of competition
Colorscope faced?
What was lacking for Cha in this
regard?
 Work Flow at Colorscope
Who recorded the job specification
details?
For how many pages a separate job bag
was opened?
What were the steps involved in the pre-
press process at colorscope?
At what stage, Re-works were
introduced?
What was special about its workers?
 The Future
What was the planned short-term
strategy?
What were considered critical in
improving the competitiveness of
Colorscope?
Why did cha track down hours spent on
re-work?
How did colorscope charge its clients?
 Qs for the future
How to improve operations?

How to change its pricing strategy?

What accounting and control system should

his company install?
1.
Qs for Discussion
Why would a customer go to Colorscope
rather than go to the large printers listed in
Exhibit 3 of the case?
2. [a] Set up a two stage cost system to figure
out the profitability of different jobs.
- You will have to choose resource drivers to
allocate the cost of resources to cost pools
- Then choose cost drivers to allocate the
costs in various cost pools to jobs. Compute
the cost driver rates. Calculate profitability of
all the jobs.
3. Who are the most [top 3] profitable
 Qs for Discussion
4. Is full cost the right metric for job
profitability and customer profitability? What
assumptions do you make about the
variability of OH costs when we do a full cost
analysis?
5. What are the financial consequences of
rework? What should colorscope do about re-
work? How?
6. What do you recommend to solve the cost-
quality tradeoff problem?
7..Should Colorscope do anything about its
incentive system?
Solution
 1. Why should a customer go to Colorscope?
Promise of error-free work[ errors are costly
for departmental stores- pre press is the last
stage at which errors can be corrected]
Beat competition on quality
Ability to understand customers requirements
due to bonding/ long term relationship
Expertise over the business
Fast turnaround time and reliable [ pre-press
is one of the least expensive phases in catalog
production ; hence speed matters a lot in
finishing the job]
 2. Two Stage Cost System
First Stage: tracing costs to different
production centers
Second Stage: Assigning the production center
costs to jobs
- Cost of resources: wages, depreciation,rent
- Resources: labor,machinery and space
- Resource Drivers used assigning cost of
resources to cost pools: square feet for
allocating Rent to production centers such as
Job Preparation, Scanning and Assembly
 2. Two stage Cost System
Cost Object: Jobs
Cost Driver: Direct Labor Hours
Direct Cost Item: only Direct Material
Indirect Cost Items: all other costs I,e
Direct Labor and Factory Ohs [ if you
assume Direct Labor as an element of
direct cost , the answer wont change as
the indirect costs are allocated based on
DLH]
 OH Driver rate calculation
Particulars Job.pr Scan. Assem Outp. QC Idle Total
Wages 8,000 32,000 64,000 10,000 11,000 - 1,25,000
[from Exhibit-11]
Depreciation 500 25,000 10,000 14,000 500 - 50,000
Rent 2,000 2,000 8,000 4,000 1,000 13,000 30,000
[allocated based on [{1000/15 [{1000/15 [{4000/ [{2000/ [{500/ [{6500/
Sq.ft]
000} 000} 15000} 15000} 15000} 15000}
*30000] *30000] *30000] *30000] *30000] *30000]
Others- allocated on 1,311 5,246 10,492 1,639 1,311 - 20,000
the basis of DLH [160/2440 [640/2440 [1280/244 [200/ [160/2440
]* ]* 0]* 2440]* ]*
20,000 20,000 20,000 20,000 20,000
Total OH 11,811 64,246 92,492 29,639 13,811 13,000 2,25,000
Labor Hours 160 640 1280 200 160
[Exhibit 9]
OH rate per DLH= Total 73.81 100.38 72.26 148.20 86.32
OH/Direct Labor hours
Floor space in sq.ft [ 1000 1000 4000 2000 500 6500 15000
 Job Profitability Analysis[in $]
Job no Reven. -Mater =Gross -Job -Scann - -outpu -QC =Net
margin prep Assem Profit
61001 9,600 5,400 4,200 295 [ 4 hours 3,212 3,035 1,186 604 -4,132
*73.81]
61002 9,600 3,500 6,100 221 2,409 2,746 1,186 691 -1,153

61003 23,000 4,500 18,500 517 4,015 5,419 2,371 691 5,487

61101 12,000 1,800 10,200 295 1,606 2,168 593 345 5,193

61102 11,000 1,500 9,500 295 1,606 2,023 593 345 4,637

61201 11,000 1,500 9,500 295 1,606 2,312 593 518 4,176

61202 23,000 3,300 19,700 517 3,212 4,191 1,186 432 10,163

61203 22,000 3,400 18,600 443 3,413 4,625 1,186 518 8,416

61204 20,000 3,200 16,800 443 3,012 4,191 1,186 691 7,278

61301 50,000 13,000 37,000 1,107 13,050 18,065 4,742 2,590 -2,554

61401 7,800 1,800 6,000 369 1,405 2,312 593 345 975

61402 8,000 3,100 4,900 295 1,907 2,312 1,186 604 -1,405

61403 8,000 3,900 4,100 295 2,008 2,457 593 259 -1,512

61404 9,000 2,100 6,900 295 2,208 2,601 593 432 771

61405 9,800 2,000 7,800 295 2,008 2,601 593 345 1,958
 Job Profitability Analysis[in $]
Job no Reven. - =Gross -Job -Scann - -outpu -QC =Net
Mater margin prep Assem Profit
61501 11,000 2,200 8,800 295 2,108 2,818 593 345 2,640

61502 11,000 3,600 7,400 295 2,008 2,890 1,186 604 417

61601 20,000 3,300 16,700 517 2,610 4,336 1,186 777 7,275

61602 2,000 600 1,400 148 502 723 148 86 -207

61603 1,400 1,000 400 148 502 795 296 86 -1,427

61701 8,000 2,100 5,900 295 2,008 2,818 593 259 -73

61702 10,000 2,500 7,500 295 2,008 2,963 593 432 1,210

61801 4,000 1,600 2,400 74 502 795 296 86 647

61901 2,000 1,700 300 148 502 867 148 86 -1,451

61902 12,000 2,200 9,800 369 1,907 3,035 593 432 3,464

62001 0 200 -200 74 100 145 148 86 -753

Cost of Idle 3,174 2,811 9,249 5,483 1,122 -21,840

time
Total 3,15,200 75,000 2,40,200 11,811 64,246 92,492 29,639 13,811 28,200

Rent-unused 13,000
floor space
Net Profits 15,200
 Inferences
10 out of 26 jobs lost money

16 out of 26 jobs made money

Most Profitable Customers????

Requires Customer Profitability Analysis
 Customer Profitability Analysis
Customer Job no. Net Profit [in $]
Number
[Second and
third digits]
10 01 -4,132
02 -1,153
03 5,487
Total NP of 10 202
11 01 5,193
02 4,637
Total NP of 11 9,830
12 01 4,176
02 10,163
03 8,416
04 7,278
Total NP of 12 30,003
 Customer Profitability Analysis
Customer Job no. Net Profit [in $]
Number
13 01 -2,554

Total NP of 13 -2,554

14 01 975

02 -1,405

03 -1,512

04 771

05 1,958

Total NP of 14 787

15 01 2,640

02 417

Total NP of 15 3,057

16 01 7,275

02 -207

03 -1,427

Total NP of 16 5,641
 Customer Profitability Analysis
Customer Job no. Net Profit
Number [in $]
17 01 -73
02 1,210
Total NP of 17 1,137
18 01 647
Total NP of 18 647
19 01 -1,451
02 3,464
Total NP of 19 2,013
20 01 -753
Total NP of 20 -753
 Most Profitable Customers
1. Customer Number 12 with a NP of $30,003

2. Customer Number 11 with a NP of $ 9,830

3. Customer Number 16 with a NP of $ 5,641

 Other Points
The 10 jobs that lost money cost Colorscope
$14,666
On the whole, Colorscope made $15,200
Idle time cost colorscope $21,840 probably because
June is a lean month
Another big expense is $13,000 in unused floor space
Cost of excess capacity : not to be allocated to jobs
and identified as a separate line item
Excess capacity : inevitable , 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 : 1. Floor
space and 2. cost pool level[pdn centre]
 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 OH costs
 Rework
What are the financial consequences of
rework?

What should Colorscope do about rework?

How ?
 Rework initiated by customers
Job No. Mater Job.pre Scan Assem Output QC Total Total
hours Cost
61001 2,700 0 1606 723 593 173 32 5,795
[16*100.38 [10*72.26] [4*148.2] [2*86.32]
]
61002 1,100 0 803 434 593 259 21 3,189
[8*] [6*] [4*] [3*]
61301 1,000 148 502 723 296 173 21 2,842
[2*73.81] [5*] [10*] [2*] [2*]
61502 1,500 74 402 578 148 0 14 2,702
[1*] [4*] [8*] [1*]
61801 1,000 0 100 217 148 0 5 1,465
[1*] [3*] [1*]
61901 1,000 74 100 289 0 0 6 1,463
[1*] [1*] [4*]
Total 8,300 296 3,513 2,964 1,778 605 99 hours 17,456
 Rework initiated by QC
Job No. Mate Job.p Scan Asse Outp QC Total Total
r re m ut hours Cost

61301 1,000 74 301 289 148 86 10 1,898

61402 1,000 0 903 1,156 296 173 29 3,528
61403 1,000 0 1004 1,012 296 86 27 3,398
61603 500 74 301 217 148 0 8 1,240
Total 3,500 148 2,509 2,674 888 345 74 10,064
hours
 Impact of rework on job profitability
Job No Revenue Gross NP Cost of Cost of NP before
Margin after rework- rework adjusting
rework customer -QC for rework
61001 9,600 4,200 -4,132 5,795 1,663
61002 9,600 6,100 -1,153 3,189 2,036
61003 23,000 18,500 5,487 5,487
61101 12,000 10,200 5,193 5,193
61102 11,000 9,500 4,637 4,637
61201 11,000 9,500 4,176 4,176
61202 23,000 19,700 10,163 10,163
61203 22,000 18,600 8,416 8,416
61204 20,000 16,800 7,278 7,278
61301 50,000 37,000 -2,554 2,842 1,898 2,186
 Impact of rework on job profitability
Job No Revenue Gross NP Cost of Cost of NP before
Margin after rework- rework adjusting
rework customer -QC for rework
61401 7,800 6,000 975 975
61402 8,000 4,900 -1,405 3,528 2,123
61403 8,000 4,100 -1,512 3,398 1,886
61404 9,000 6,900 771 771
61405 9,800 7,800 1,958 1,958
61501 11,000 8,800 2,640 2,640
61502 11,000 7,400 417 2,702 3,119
61601 20,000 16,700 7,275 7,275
61602 2,000 1,400 -207 -207
61603 1,400 400 -1,427 1,240 -187
61701 8,000 5,900 -73 -73
61702 10,000 7,500 1,210 1,210
 Impact of rework on job profitability
Job No Revenu Gross NP Cost of Cost of NP before
e Margin after rework- rework adjusting
rework customer -QC for rework
61801 4,000 2,400 647 1,465 2,112
61901 2,000 300 -1,451 1,463 12
61902 12,000 9,800 3,464 3,464
62001 0 -200 -753 -753
Cost of -21,840 -21,840
Idle time
Total 3,15,200 2,40,200 28,200 55,907
Rent- -13,000 -13,000
unused
fl.space
Net 15,200 42,907
 Inference
Rework reduces Colorscopes profit
by $ 27,707
 Impact on Customer Profitability
Customer Number Job no. Net Profit [in $]
[Second and third digits]
10 01 1,663
02 2,036
03 5,487
Total NP of 10 9,186
11 01 5,193
02 4,637
Total NP of 11 9,830
12 01 4,176
02 10,163
03 8,416
04 7,278
Total NP of 12 30,003
13 01 2,186
Total NP of 13 2,186
 Impact on Customer Profitability
Customer Number Job no. Net Profit [in $]
[Second and third
digits]
14 01 975
02 2,123
03 1,886
04 771
05 1,958
Total NP of 14 7,713
15 01 2,640
02 3,119
Total NP of 15 5,759
16 01 7,275
02 -207
03 -187
Total NP of 16 6,881
 Impact on Customer Profitability
Customer Number Job no. Net Profit [in $]
[Second and third
digits]
17 01 -73
02 1,210
Total NP of 17 1,137
18 01 2,112
Total NP of 18 2,112
19 01 12
02 3,464
Total NP of 19 3,476
20 01 -753
Total NP of 20 -753
 Top 3 customers on profitability
1. Customer no.12 with a NP of $ 30,003

2. Customer no.11 with a NP of $ 9,830

3. Customer no.10 with a NP of $9,186

 What should colorscope do? How?
Pre-press takes about 2 weeks time [40% of total
time-exhibit 2] but the cost of pre-press for a
catalog is less than 2% of total cost [
30,000/15,10,000-exhibit 4]
Clients will be price sensitive only if colorscope is in
the same league as its competitors in terms of
quality and delivery time
Reducing pre-press time would be a huge
competitive advantage for color & would enable the
company to command a price premium
However the rework process is extremely valuable
to some customers who seek perfection
 Cost-Quality tradeoff
Price customer initiated rework
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
 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

Joe wants to share the gains from eliminating

rework with his employees
 ABC for Colorscope
Can not afford expensive consultants to
set up ABC system

It can use its payroll system to do a job

profitability analysis on a regular basis