Case #3 Phantom Printing

Case #3 Phantom Printing J annell Erickson reected on both offers she had received in the past couple of days. First, Artie Norman, a friend of Erickson's and the owner of a small company in nearby Yakima, Washington, had called to see if Erickson's printing company, Phantom Printing, could accommodate a special printing order next month. In addition, Jack Wolfe, the owner of a local one-room printing operation in Ellensburg, Washington, called The Print Stop, had stopped by to see if Phantom Printing could use some help printing color brochures over the next few months. Company Background Erickson's company, Phantom Printing, printed elaborate high-quality color brochures in its facility located in Ellensburg, Washington. It primarily served the businesses in the Chelan, Kittitas and Yakima Counties in Central Washington. Monthly production in its Ellensburg facility ranged from 130,000 to 150,000 brochures per month. Full capacity was 150,000 brochures per month and brochures are run in batches of 100 (capacity was 1,500 batches per month). Jannell Erickson owned and managed the company. She employed one sales representative and one printing press operator, although she frequently relied on temporary labor to help in the printing process as needed to accommodate any changes in printing volume. Jannell felt that many of her costs were xed, but that some costs varied with the number of batches she printed and sold. Exhibit 1 contains information related to Phantom's monthly operating costs for the last three months. The company typically priced its printing services at an average of $20 per 100 brochures printed. Historically, Erickson had encountered little variation in pricing from job to job, although occasionally, special pricing situations did arise. She wondered how she should handle those special situations. She didn't have a \"rule of thumb\" she could apply, but she wished she could nd one. The Special Order In his phone call, Artie Norman indicated that he needed a special job printed next month. He needed 25,000 brochures related to a new product for distribution at three trade shows he was attending. When J annell quoted Artie the usual price of $20 per 100 brochures, Artie sighed. \"Jannell, I know that Phantom Printing does a high-quality job, but I'm short on funds right now because I spent so much on getting this new product up and running. I can't go any higher than $13 per 100 brochures on this job. I'm sure the brochures won't look as nice, but that's all I've got to spend.\" J annell was enthused about the potential business, but when she inquired about whether Artie would have future printing needs that Phantom could help with, Artie expressed doubt. \"We just don't do much of this type of stuff. This is the rst material we've had printed like this in years, and we're only doing it because we're trying to get this new product off the ground. I suspect this will be the last for a long while.\" J annell knew she didn't have the capacity at the moment to handle the special order. And, $13 per 100 brochures sounded low. Jannell replied, \"Let me look into this. I'm not sure we can do it for $13, but I'll be glad to think about it. I'll give you a callback in a couple of days.\" Jannell realized that with this order she wouldn't have to pay her sales representative the typical commission of $1.25 per 100 brochures, but that $1.25 savings wouldn't begin to make up for the lower price. The Outsourcing Opportunity Jack Wolfe owned a local one-room printing operation called The Print Stop. His largest customer has just informed him that it was going out of business and would no longer need his printing services. Most of The Print Stop's customers were small companies needing basic printing services in small quantities. But a few of his customers, including his largest customer, used his services for both basic printing and more elaborate work, including color brochures. Jack had a long-standing relationship with the customer's owner and had purchased the small printing press he used for color brochures partially to serve this customer's needs. He wasn't sure how he was going to get enough business to make up for this loss, especially since he primarily was known for his basic printing services rather than printing elaborate brochures. Jack decided to stop by to talk with J annell Erickson, owner of Phantom Printing. \"I've had some bad luck. My largest customer just informed me that it is closing its doors. I've been doing their color printing work for several years, and their closing leaves me with a lot of idle capacity. I wonder if you have any extra brochure printing I can help with. I'd be happy to do it really cheaply, just to keep my press going. [would go as low as $10 per 100 brochures. And I could handle 30,000 brochures for you next month.\" J annell thought that $10 per 100 brochures sounded like a good deal. She wasn't sure that even she could print that cheaply. And she knew that The Print Stop did a good job. She has used them before. They did high-quality work, and were dependable. Required: 1. Consider the special order from Artie Norman. a. Phantom Printing is operating at around full capacity: 150,000 brochures (1,500 batches). Should Erickson accept the special order? b. Assume that monthly 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 Exhibit 1. Also assume that this order would not affect any of Phantom's current business with its regular customers. Should Erickson accept the special order? 2. Consider the outsourcing opportunity form Jack Wolfe of The Print Stop. Should Phantom outsource 30,000 brochures to The Print Stop? 3. Would it be protable for Phantom Printing to print the special order for Artie Norman, while outsourcing 25,000 brochures to The Print Stop? 4. Make a final recommendation to Janelle Erickson as to what she should do related to these two offers. Include in your recommendation any other (qualitative) factors that should be considered and how those factors may influence the recommendation. Exhibit 1 Phantom Printing Monthly Summary of Operating Costs October November December Volume (brochures) 147,500 135,000 150,000 Volume (batches of 100 brochures) 1,475 1,350 1,500 Manufacturing costs: Direct material $ 5,895 $ 5,400 6,000 Direct labor 5,560 5,363 5,625 Manufacturing overhead 6,475 6,200 6,500 Total Manufacturing costs 17,930 $ 16,963 $ 18,125 Nonmanufacturing costs: Sales costs S 3,750 $ 3,588 $ 3,775 Corporate costs 3,750 3,750 3,750 Total nonmanufacturing costs $ 7,500 $ 7,338 $ 7,525 Total Costs $ 25,430 $ 24,300 $ 25, 650