John Johnson reflected on both offers he had received in the past couple of days. First, Abbie Jenkins, a friend of Johnson's and the owner of a small company in nearby Keswick, Virginia, had called to see if Johnson's printing company, FinePrint Company, could accommodate a special printing order next month. In addition, Ernest Bradley, the owner of a local one-room printing operation in Charlottesville, Virginia, called SmallPrint Shop, had stopped by to see if 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. 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. Johnson 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 Johnson quoted Jenkins the usual price of $17 per 100 brochures, Jenkins sighed and said: 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.

Johnson was enthused about the potential business, but when he inquired about whether Abbie would have future printing needs that FinePrint could help with, Jenkins 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 product off the ground. I suspect this will be the last for a long while."

Johnson knew he didn't have the capacity at the moment to handle the special order. And, $10 per 100 brochures sounded low. Johnson 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." Johnson 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 wouldn't begin to make up for the lower price.

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. Bradley 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.

Bradley 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 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. I would go as low as $8 per 100 brochures. And I could handle 30,000 brochures for you next month."

Johnson 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 were dependable.

At the current capacity (150,000 brochures), should FinePrint accept the outsourcing opportunity and outsource 30,000 brochures to SmallPrint?

Exhibit 1 FinePrint Company (Abridged) Summary of Monthly Operating Costs Monthly costs at 150,000 volume Manufacturing costs: Direct material - variable $ 6,000 Direct labor - variable 1,500 Direct labor - fixed 3,000 Manufacturing overhead - variable 1,500 Manufacturing overhead - fixed 3,375 Total manufacturing costs $15,375 Nonmanufacturing costs: Sales - variable 1,500 Sales - fixed 1,875 Corporate - fixed 3,750 Total nonmanufacturing costs $ 7,125 Total costs $22,500