iPrint Company

Tom Thompson reflected on both offers he had received in the past couple of days. First, Valerie Smith, a friend of Thompson's and the owner of a small company in nearby Keswick, Virginia, had called to see if Thomson's printing company, iPrint Company, could accommodate a special pricing order next month. In addition, Earle Beardsley, the owner of a local one-room printing operation in Charlottesville, Virginia, called the SmallPrint Shop, had stopped by to see if the iPrint Company could use some help printing colour brochures over the next few months.

Company Background

Thompson's company, iPrint Company, printed elaborate high-quality colour 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 area of the state. Monthly production at its Charlottesville facility was running around full capacity of 150,000 brochures per month. Thompson owned and managed the company. He employed one sales representative and one printing press operator, although he frequently relied on temporary labour to help in the printing process as needed to accommodate any changes in printing volumes. Thompson felt that many of his costs were fixed, but that some costs varied with the number of brochures he printed and sold. Thompson uses Simply Accounting but at the most basic level (Total Revenues and Total Expenses) but it does not provide any cost analysis, nor does Thompson know how to proceed with analysing his costs. Exhibit 1 contains information related to iPrint'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, Thompson 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 wished he could find one.

The Special Order

During her phone call, Valerie Smith indicated that she needed a special job printed next month. She needed 25,000 brochures related to a new product for distribution at three prominent trade shows she was attending. When Thompson quoted Smith the usual price of $17 per 100 brochures, she sighed and said:

Tom, I know that iPrint does a high-quality job, but I'm short on funds right now because I've spent so much on getting this new product launched. I can't go any higher than $10 per 100 brochures on this job. If you can't do it for that price, 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.

Thompson knew he lacked the capacity now to handle the special order, but he is friends with Valerie and anticipates there may be future business if this order is done well. But, he has concerns as the $10 per 100 brochures sounded low. Tom replied, "Let me look into this. I'm not sure we can do it for $10, but I'll be glad to think about it. I'll give you a call back in a couple of days." Thompson realized that with this order he wouldn't have to pay his sales representative the typical sales commission of $1 per 100 brochures, but that $1 savings would begin to make up for the lower price.

The Outsourcing Opportunity

Earle Beardsley 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 services. Most of SmallPrint's customers were small companies needing basic printing service 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 colour brochures. Beardsley had a long-standing relationship with the customer's owner and had purchased the small printing press he used for colour 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 print services rather than printing elaborate brochures. Beardsley decided to stop by to talk with Tom Thompson.

I've had some bad luck. My largest customer just informed me that it is closing its doors. I've been doing their colour 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 you 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.

Thompson thought that $8 per 100 brochures sounded like a good deal. He wasn't sure that even he could print that cheaply. And he knew that SmallPrint did a good job. He had used them before. They did high-quality work, and they were dependable.

Exhibit 1

iPrint Company

Summary of Monthly Operating Costs

150.000 volume

Direct materials $ 6,000

Direct hourly labour 1,500

Direct salaries 3,000

Manufacturing equipment depreciation 1,575

Manufacturing mortgage expense 1,800

Manufacturing overhead - variable 1,500

Office depreciation 750

Office salaries 3,000

Selling expense - commissions 1,500

Selling expense - fixed 1,875

Total costs $ 22,500

Direct salaries are committed manufacturing salaries

Required:

A. What is the current situation regarding Thompson's financials position and reporting? - CREAT A financial statement that will be useful for Thompson for analysis purposes. (unit costs and totals where appropriate). Abbreviations allowed (i.e. DM for direct materials)

B. Address the following in your report:

1. Determine the break-even point for iPrint in both units (total brochures) and in sales dollars.

2. Option 1. Consider the special order from Valerie Smith. Should iPrint accept the order at $10 per 100 brochures given they are currently operating at capacity? Provide both quantitative and qualitative analysis. If Thompson could expand capacity by adding production to a Sunday or night shift, would your recommendation change?

3. Option 2. Consider the outsourcing opportunity from Earle Beardsley of SmallPrint Shop. Should iPrint outsource 30,000 brochures, of its current operations, to SmallPrint? Provide both a quantitative and qualitative analysis.

4. Option 3. Combination. Would it be profitable for iPrint to accept and print the special order for Valerie Smith, while outsourcing 25,000 brochures to SmallPrint? Provide a combined statement showing operating income should both alternatives be considered.