Exhibit 1 FINEPRINT COMPANY (B) Summary of Monthly Operating Costs Monthly costs at 150,000 volume Manufacturing costs: Direct material - variable Direct labor - variable Direct labor - fixed Manufacturing overhead variable Manufacturing overhead - fixed Total manufacturing costs $ 6,000 1,500 3,000 1,500 3,375 $15,375 Non-manufacturing costs: Sales - variable Sales - fixed Corporate fixed Total non-manufacturing costs Total costs 1,500 1,875 3,750 $ 7,125 $22,500 John Johnson listened intently as Ernest Bradley, sitting across the table in Johnson's office, outlined his proposal. Ernest Bradley, the owner of a local one-room printing operation in Charlottesville, Virginia called SmallPrint Shop, had stopped by to see if Johnson's printing company, FinePrint Company, could use some help printing color brochures over the next few months. COMPANY BACKGROUND Johnson's company, FinePrint Company, printed elaborate high-quality color brochures in its facility located in Charlottesville, Virginia. It primarily served other businesses in the central Virginia area, although it did have some clients in southwest Virginia and as far east as the Chesapeake Bay region of the state. Monthly production at its Charlottesville facility was running at around full capacity of 150,000 brochures per month. John Johnson owned and managed the company. He employed one sales representative and one printing press operator, although he frequently relied on temporary labor to help in the printing process as needed to accommodate any changes in printing volume. John felt that many of his costs were fixed, but that some costs varied with the number of brochures he printed and sold. Exhibit 1 contains information related to FinePrint's monthly operating costs for the company's current activity level of 150,000 brochures per month. THE OUTSOURCING OPPORTUNITY Ernest Bradley owned a local one-room printing operation called SmallPrint Shop. His largest customer had just informed him that it was going out of business and would no longer need his printing services. Most of SmallPrint's customers were small companies needing basic printing services in small quantities. But several of his customers, including his largest customer, used his services for both basic printing services and more elaborate work, including color brochures. Ernest 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. Ernest decided to stop by to talk with John Johnson, owner of FinePrint Company. 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 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. I would go as low as $8 per 100 brochures. And I could handle 30,000 brochures for you next month." John Johnson thought about both offers he had received last week. First, he had to turn down Abbie Jenkins' special request for 25,000 brochures at $10 per 100 brochures. FinePrint just didn't have the capacity to produce 25,000 brochures at such a low price, especially since it didn't seem to have the potential to generate any future business beyond the special order. After some analysis, Johnson had realized that if he had the capacity to handle the 25,000 brochures, it would be a profitable order for FinePrint because a $10 price was greater than FinePrint's variable costs of printing the brochures. But, since the company was operating at full capacity, he just couldn't afford to drop his regular business to handle Abbie's request. Next, he had to turn down Ernest Bradley's offer to handle printing 30,000 brochures for FinePrint for $8 per 100 brochures. After considering that offer, Johnson had realized that FinePrint's variable costs of printing the brochures were even lower than the $8 per 100 brochures that Bradley was offering. So it really didn't make sense for FinePrint to outsource any printing to Bradley's company, SmallPrint Shop. John wondered if he should call Ernest Bradley and let him know that Abbie Jenkins had a special printing request that he might be interested in. Then, when it occurred to him that Abbie was offering to pay $10 per 100 brochures, and Ernest was offering to print them for $8 per 100 brochures, Johnson thought, Why shouldn't FinePrint be the one to get the $2 difference?" If he could outsource 25,000 brochures to SmallPrint, then he could print the 25,000 brochures that Abbie wanted. John decided to spend some time that evening to determine if that would be profitable for FinePrint. He hoped that Abbie hadn't found someone else to do her special order. He also hoped that Ernest hadn't found another printing company that was interested in his help. Fineprint Question A: 1- Assume that Fineprint is operating at full capacity; 150,000 brochures. Should Johnson accept the special offer? 2- Assume that monthly activity is 200,000 brochures, current production is 150,000 and the same operating costs that are shown in part A. Should Johnson accept the special offer? Fineprint Question B: 3- Should Fineprint outsource the 30,000 brochures to Smallprint if Fineprint is at capacity (150,000 brochures)? What about if capacity was 200,000 brochures? Fineprint Question C: 4-1f Fineprint could print the special orders for Jenkins, should they outsource 25,000 brochures to Smallprint? COMPANY BACKGROUND Johnson's company, FinePrint Company, printed elaborate high-quality color brochures in its facility located in Charlottesville, Virginia. It primarily served other businesses in the central Virginia area, although it did have some clients in southwest Virginia and as far east as the Chesapeake Bay region of the state. Monthly production at its Charlottesville facility was running at around full capacity of 150,000 brochures per month. John Johnson owned and managed the company. He employed one sales representative and one printing press operator, although he frequently relied on temporary labor to help in the printing process as needed to accommodate any changes in printing volume. John felt that many of his costs were fixed, but that some costs varied with the number of brochures he printed and sold. Exhibit 1 contains information related to FinePrint's monthly operating costs for the company's current activity level of 150,000 brochures per month The company typically priced its printing services at an average of $17 per 100 brochures printed. Historically, Johnson had encountered little variation in pricing from job to job, although occasionally, special situations did arise. He wondered how he should handle those special situations. He didn't have a "rule of thumb he could apply, but he wished he could find one. THE SPECIAL ORDER In her phone call, Abbie Jenkins indicated that she needed a special job printed next month. She needed 25,000 brochures related to a new product for distribution at three trade shows she was attending. When John quoted Abbie the usual price of $17 per 100 brochures, Abbie sighed. "John, I know that FinePrint does a high-quality job, but I'm short on funds right now because I have spent so much on getting this new product up and running. I can't go any higher than $10 per 100 brochures on this job. If you can't do it for that, I'll have to go to someone else. I'm sure the brochures won't look as nice, but that's all I've got to spend. John was enthused about the potential business, but when he inquired about whether Abbie would have future printing needs that FinePrint could help with, Abbie expressed doubt. We just don't do much of this type of stuff. This is the first material we've had printed like this in years, and we're only doing it because we're trying to get this new prod off the nd. I suspect this will be the last for a long while." Exhibit 1 FINEPRINT COMPANY (B) Summary of Monthly Operating Costs Monthly costs at 150,000 volume Manufacturing costs: Direct material - variable Direct labor - variable Direct labor - fixed Manufacturing overhead variable Manufacturing overhead - fixed Total manufacturing costs $ 6,000 1,500 3,000 1,500 3,375 $15,375 Non-manufacturing costs: Sales - variable Sales - fixed Corporate fixed Total non-manufacturing costs Total costs 1,500 1,875 3,750 $ 7,125 $22,500 John Johnson listened intently as Ernest Bradley, sitting across the table in Johnson's office, outlined his proposal. Ernest Bradley, the owner of a local one-room printing operation in Charlottesville, Virginia called SmallPrint Shop, had stopped by to see if Johnson's printing company, FinePrint Company, could use some help printing color brochures over the next few months. COMPANY BACKGROUND Johnson's company, FinePrint Company, printed elaborate high-quality color brochures in its facility located in Charlottesville, Virginia. It primarily served other businesses in the central Virginia area, although it did have some clients in southwest Virginia and as far east as the Chesapeake Bay region of the state. Monthly production at its Charlottesville facility was running at around full capacity of 150,000 brochures per month. John Johnson owned and managed the company. He employed one sales representative and one printing press operator, although he frequently relied on temporary labor to help in the printing process as needed to accommodate any changes in printing volume. John felt that many of his costs were fixed, but that some costs varied with the number of brochures he printed and sold. Exhibit 1 contains information related to FinePrint's monthly operating costs for the company's current activity level of 150,000 brochures per month. THE OUTSOURCING OPPORTUNITY Ernest Bradley owned a local one-room printing operation called SmallPrint Shop. His largest customer had just informed him that it was going out of business and would no longer need his printing services. Most of SmallPrint's customers were small companies needing basic printing services in small quantities. But several of his customers, including his largest customer, used his services for both basic printing services and more elaborate work, including color brochures. Ernest 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. Ernest decided to stop by to talk with John Johnson, owner of FinePrint Company. 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 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. I would go as low as $8 per 100 brochures. And I could handle 30,000 brochures for you next month." John Johnson thought about both offers he had received last week. First, he had to turn down Abbie Jenkins' special request for 25,000 brochures at $10 per 100 brochures. FinePrint just didn't have the capacity to produce 25,000 brochures at such a low price, especially since it didn't seem to have the potential to generate any future business beyond the special order. After some analysis, Johnson had realized that if he had the capacity to handle the 25,000 brochures, it would be a profitable order for FinePrint because a $10 price was greater than FinePrint's variable costs of printing the brochures. But, since the company was operating at full capacity, he just couldn't afford to drop his regular business to handle Abbie's request. Next, he had to turn down Ernest Bradley's offer to handle printing 30,000 brochures for FinePrint for $8 per 100 brochures. After considering that offer, Johnson had realized that FinePrint's variable costs of printing the brochures were even lower than the $8 per 100 brochures that Bradley was offering. So it really didn't make sense for FinePrint to outsource any printing to Bradley's company, SmallPrint Shop. John wondered if he should call Ernest Bradley and let him know that Abbie Jenkins had a special printing request that he might be interested in. Then, when it occurred to him that Abbie was offering to pay $10 per 100 brochures, and Ernest was offering to print them for $8 per 100 brochures, Johnson thought, Why shouldn't FinePrint be the one to get the $2 difference?" If he could outsource 25,000 brochures to SmallPrint, then he could print the 25,000 brochures that Abbie wanted. John decided to spend some time that evening to determine if that would be profitable for FinePrint. He hoped that Abbie hadn't found someone else to do her special order. He also hoped that Ernest hadn't found another printing company that was interested in his help. Fineprint Question A: 1- Assume that Fineprint is operating at full capacity; 150,000 brochures. Should Johnson accept the special offer? 2- Assume that monthly activity is 200,000 brochures, current production is 150,000 and the same operating costs that are shown in part A. Should Johnson accept the special offer? Fineprint Question B: 3- Should Fineprint outsource the 30,000 brochures to Smallprint if Fineprint is at capacity (150,000 brochures)? What about if capacity was 200,000 brochures? Fineprint Question C: 4-1f Fineprint could print the special orders for Jenkins, should they outsource 25,000 brochures to Smallprint? COMPANY BACKGROUND Johnson's company, FinePrint Company, printed elaborate high-quality color brochures in its facility located in Charlottesville, Virginia. It primarily served other businesses in the central Virginia area, although it did have some clients in southwest Virginia and as far east as the Chesapeake Bay region of the state. Monthly production at its Charlottesville facility was running at around full capacity of 150,000 brochures per month. John Johnson owned and managed the company. He employed one sales representative and one printing press operator, although he frequently relied on temporary labor to help in the printing process as needed to accommodate any changes in printing volume. John felt that many of his costs were fixed, but that some costs varied with the number of brochures he printed and sold. Exhibit 1 contains information related to FinePrint's monthly operating costs for the company's current activity level of 150,000 brochures per month The company typically priced its printing services at an average of $17 per 100 brochures printed. Historically, Johnson had encountered little variation in pricing from job to job, although occasionally, special situations did arise. He wondered how he should handle those special situations. He didn't have a "rule of thumb he could apply, but he wished he could find one. THE SPECIAL ORDER In her phone call, Abbie Jenkins indicated that she needed a special job printed next month. She needed 25,000 brochures related to a new product for distribution at three trade shows she was attending. When John quoted Abbie the usual price of $17 per 100 brochures, Abbie sighed. "John, I know that FinePrint does a high-quality job, but I'm short on funds right now because I have spent so much on getting this new product up and running. I can't go any higher than $10 per 100 brochures on this job. If you can't do it for that, I'll have to go to someone else. I'm sure the brochures won't look as nice, but that's all I've got to spend. John was enthused about the potential business, but when he inquired about whether Abbie would have future printing needs that FinePrint could help with, Abbie expressed doubt. We just don't do much of this type of stuff. This is the first material we've had printed like this in years, and we're only doing it because we're trying to get this new prod off the nd. I suspect this will be the last for a long while