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Colorscope, Inc.

A. PRELIMINARY
In company is likely to have customers who have a specific request to the
order. Therefore is necessary to know about the customer profitability analysis
based ABM method for determine the activity, the costs and benefits to
following the customer request. Activity Based Management (ABM) is a
system that focuses the attention
n of the management to increase customer value and profits to be earned
and using ABC information to eliminate non-value added cost and activities.
ABM emphasizes both on the product costing and process value analysis.
Some of the specific uses of ABM in organization, management can identify
and measure quality costs of the product. And then, one of the components
that support the success of ABM is just in time. Just in time is a system that
focuses on the elimination of waste activity by producing products in
accordance with constumer demand and only buy materials according to
production requirement.
B. Profile of Company
Colorscope, Inc
Colorscope,Inc. is a small firm in the graphic arts industry and the founder
is Andrew Cha. On 1967 Andrew Cha immigrated to the USA for a better life.
At the beginning, of its establishment the company provides special effects
photography laboratory to companies advertising local in Southen California.
Along with the growing reputation of Andrew Cha, Colorscope also
experienced an increase in business and can earn income $5 million dollars on
1988. Colorscope begin to served agency giants such as Saatchi & Saatchi,
Grey Advertising, and J. Walter Thompson, large retailing and entertainment
companies such as The Walt Disney Company.
In 1988, R. R. Donnelley was approached to Andrew Cha and interested in
acquiring Colorscope,Inc. But after considering his options and his belief in
the potential of the business, and Andrew Cha dissatisfied with several of the
contingency and non-compete clauses built into the agreement so eventually
decided not sale his company. After taking the decision, there is a trend change

for significant in field of graphic art and make there are price pressures from
competitors using cheaper hardware but had the ability to layout and better
color correction. The impact of these trends make colorscope was forced to
lower their selling prices to keep up with market demands.
1200
1000
800
600

Colorscope

400

Service-Bureau

200
0
1991

1992

1993

1994

1995

Pic. 1.1. Price Trend of Colorscope from 1991 until 1995


Because of this trend, Colorscope must review of they strategic for the
face of the overall market by evaluating pricing strategies, product and
operational process of market segmentation in order to remain competitive in
this industry.
C. Problem
Development of new technologies and the number of competitors that
offer low price with the same quality are factors that affect competition in the
industry colorscope. Therefore, Andrew Cha start thinking about the next
innovation associated with the business activity of Colorscope. So the problem
in Colorscope are :
1. How Colorscope improve this operation?
2. How their pricing strategy?
D. Analysis
To develop and improve this business Colorscope must optimize the
production capacity, because in June 1996 there were a total of 249 hours of
idle time and floor space unused measuring 6500. It shows there is still a
capacity of working hours and floor space can be used by Colorscope to work
on other order. Then for other development and improvement of Colorscope
company is related to the accounting system. By using the customer
profitability analysis, Colorscope can know the total cost and the profit to be
earned. So started by using ABC system, overhead costs Colorscope can be

allocated to the entire process of order. The allocation cost process is tracking
by using the allocation of working hours of each activity.
Table 1.1. Overhead Rate

DESCRIPTION
Wages
Depreciation
Rent
Others
Total Overhead
> Labor hour
> OH rate / hour
Floor space in sq. ft.

QUALITY
CONTRO
L
$11.000
$500
$1.000
$1.311
$13.811
160

JOB
PREPARATION
$8.000
$500
$2.000
$1.311
$11.811
160

SCANNING
$32.000
$25.000
$2.000
$5.246
$64.246
640

$73,82

$100,38

$72,26

$148,20

$86,32

1000

1000

4000

2000

500

ASSEMBLY OUTPUT
$64.000
$10.000
$10.000
$14.000
$8.000
$4.000
$10.492
$1.639
$92.492
$29.639
1280
200

IDLE

TOTAL
$125.000
$50.000
$13.000 $30.000
$20.000
$13.000 $225.000
2440
6500

From the calculate of overhead rate in table 1.1. , and then the next step
calculated of each total cost and the profit can get from each order of customers.
For more detail can see in table 1.2.
Table 1.2. Profotability Analysis by Job
Job

Customer

Revenue

Materials

61001
61002
61003
61101
61102
61201
61202
61203
61204
61301
61401
61402
61403

10
10
10
11
11
12
12
12
12
13
14
14
14

$9.600
$9.600
$23.000
$12.000
$11.000
$11.000
$23.000
$22.000
$20.000
$50.000
$7.800
$8.000
$8.000

$5.400
$3.500
$4.500
$1.800
$1.500
$1.500
$3.300
$3.400
$3.200
$13.000
$1.800
$3.100
$3.900

Job

Customer

Revenue

Materials

61404
61405
61501
61502
61601

14
14
15
15
16

$9.000
$9.800
$11.000
$11.000
$20.000

$2.100
$2.000
$2.200
$3.600
$3.300

Gross
margin
$4.200
$6.100
$18.500
$10.200
$9.500
$9.500
$19.700
$18.600
$16.800
$37.000
$6.000
$4.900
$4.100
Gross
margin
$6.900
$7.800
$8.800
$7.400
$16.700

Overhead Net profit


(Loss)
cost
$8.332
($4.132)
$7.253
($1.153)
$13.013
$5.487
$5.007
$5.193
$4.863
$4.637
$5.324
$4.176
$9.537
$10.163
$10.184
$8.416
$9.522
$7.278
$39.554
($2.554)
$5.025
$975
$6.305
($1.405)
$5.612
($1.512)
Overhead Net profit
cost
(Loss)
$6.129
$771
$5.842
$1.958
$6.160
$2.640
$6.983
$417
$9.425
$7.275

15000

61602
61603
61701
61702
61801
61901
61902
62001

16
16
17
17
17
19
19
20

$2.000
$1.400
$8.000
$10.000
$4.000
$2.000
$12.000
$0
Idle time
Total
Rent unused floor space
Net profit

$600
$1.000
$2.100
$2.500
$1.600
$1.700
$2.200
$200

$1.400
$400
$5.900
$7.500
$2.400
$300
$9.800
-$200

$1.607
$1.827
$5.973
$6.290
$1.753
$1.751
$6.336
$553

Table 1.3. Most Profotable Jobs


Job

Net profit (Loss)

Explanation

61202
61203
61204
61601
61003
61101
61102
61201
61902
61501
61405
61702
61401
61404
61801
61502
Job
61701
61602
62001
61002
61402
61603
61901

$10.163
$8.416
$7.278
$7.275
$5.487
$5.193
$4.637
$4.176
$3.464
$2.640
$1.958
$1.210
$975
$771
$647
$417
Net profit (Loss)
($73)
($207)
($753)
($1.153)
($1.405)
($1.427)
($1.451)

Most Profitable

Explanation

($207)
($1.427)
($73)
$1.210
$647
($1.451)
$3.464
($753)
($21.840)
$28.200
$13.000
$15.200

61403
($1.512)
61301
($2.554)
61001
($4.132)
Least Profitable
Idle time
($21.840)
In table 1.3. have some explanation about Colorscope have cost of idle
time amount $21.840 and rent cost amount of $13.000, so Colorscope have excess
cost amount $34.840. And then, from the table 1.3. we also know about some
jobs order can get more profit or get loss. In total, only 16 out of 26 jobs were
profitable. For example job order 61201 is most profitable and least profitable is
job order 61001. This is due to the cost of rework. In Colorscope, Inc. have two
type of rework cost, the first is rework due to changes in the specifications of the
customer and rework due to errors. The most rework costs for companies is
rework due to changes in the specifications of the customer. Total cost rework due
to change in specification by customer amount $ 17.454 and total cost quality
control initiated rework of house errors amount $ 10.065.
Table 1.4. Rework Due To Change In Specification by Customer
JOB
61001
61002
61301
61502
61801
61901

JOB
PREPARATION
0
0
$147,64
$73,82
0
$73,82

SCANNING ASSEMBLY OUTPUT


$1.606,15
$803,07
$501,92
$401,54
$100,38
$100,38
TOTAL

$722,59
$433,56
$722,59
$578,07
$216,78
$289,04

$592,79
$592,79
$296,39
$148,20
$148,20
0

QUALITY
MATERIAL
CONTROL
$172,64
$2.700
$258,97
$1.100
$172,64
$1.000
0
$1.500
0
$1.000
0
$1.000

TOTAL
COST
$5.794
$3.188
$2.841
$2.701
$1.465
$1.46
$17.454

Table 1.5. Quality Control Initiated Rework of House Errors


JOB
61301
61402
61403
61603

JOB
PREPARATION
$73,82
$73,82

SCANNING ASSEMBLY OUTPUT


$301,15
$289,04
$903,46
$1.156,15
$1.003,84
$1.011,63
$301,15
$216,78
TOTAL

$148,20
$296,39
$296,39
$148,20

QUALITY
MATERIAL
CONTROL
$86,32
$1.000
$172,64
$1.000
$86,32
$1.000
$500

TOTAL
COST
$1.898
$3.528
$3.398
$1.239
$10.065

If Colorscope wants to minimize of rework cost, the first Colorscope must


make a deal with customer when in first step process have a changed its cant do it
because its can effect on wages of employees. But if

had to be reworks,

customers must incur additional costs in accordance with the desired changes that
do not affect the cost quality of products. The second for resolve rework due to
errors, Colorscope must check their machinery and equipment before to use or
update their equipment. So as to shorten the time to rework and can finish on
time. Colorscope must also improve transfer pricing on its products, which
colorscope give the same price per page for each customer even though the
customer has a different request. For more detail can see in table 1.6.
Table 1.6. Minimum Price for Order With Rework
JOB

PRICE/
PAGE

PAGES

61001
61002
61402
61403
61603

$600
$600
$500
$500
$350

16
16
16
16
4

FIRST
OH
COST
$8.332
$7.253
$6.305
$5.612
$1.827

REWORK
COST

MINIMUM
PRICE

$5.794
$3.188
$3.528
$3.398
$1.239

$14.126
$10.441
$9.833
$9.010
$3.066

PRICE/PAGE
AFTER
REWORK
$883
$653
$615
$563
$767

E. Conclusion
The technology developments are so quick to bring a strong impact on the
sustainability of Colorscope, Inc. in facing the competition. So the company
must follow the development of technology. And other side Colorscope have
problem regarding rework costs resulting from a change in the specifications
of customer orders and error in quality control. Therefore, Colorscope require
policies to charge to the customer for minimize the rework cost and strategy
about transfer pricing