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

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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
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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
QUALITY
JOB CONTRO
DESCRIPTION PREPARATION SCANNING ASSEMBLY OUTPUT L IDLE TOTAL
Wages $8.000 $32.000 $64.000 $10.000 $11.000 $125.000
Depreciation $500 $25.000 $10.000 $14.000 $500 $50.000
Rent $2.000 $2.000 $8.000 $4.000 $1.000 $13.000 $30.000
Others $1.311 $5.246 $10.492 $1.639 $1.311 $20.000
Total Overhead $11.811 $64.246 $92.492 $29.639 $13.811 $13.000 $225.000
> Labor hour 160 640 1280 200 160 2440
> OH rate / hour $73,82 $100,38 $72,26 $148,20 $86,32
Floor space in sq. ft. 1000 1000 4000 2000 500 6500 15000
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
Gross Overhead Net profit
Job Customer Revenue Materials
margin cost (Loss)
61001 10 $9.600 $5.400 $4.200 $8.332 ($4.132)
61002 10 $9.600 $3.500 $6.100 $7.253 ($1.153)
61003 10 $23.000 $4.500 $18.500 $13.013 $5.487
61101 11 $12.000 $1.800 $10.200 $5.007 $5.193
61102 11 $11.000 $1.500 $9.500 $4.863 $4.637
61201 12 $11.000 $1.500 $9.500 $5.324 $4.176
61202 12 $23.000 $3.300 $19.700 $9.537 $10.163
61203 12 $22.000 $3.400 $18.600 $10.184 $8.416
61204 12 $20.000 $3.200 $16.800 $9.522 $7.278
61301 13 $50.000 $13.000 $37.000 $39.554 ($2.554)
61401 14 $7.800 $1.800 $6.000 $5.025 $975
61402 14 $8.000 $3.100 $4.900 $6.305 ($1.405)
61403 14 $8.000 $3.900 $4.100 $5.612 ($1.512)
Gross Overhead Net profit
Job Customer Revenue Materials
margin cost (Loss)
61404 14 $9.000 $2.100 $6.900 $6.129 $771
61405 14 $9.800 $2.000 $7.800 $5.842 $1.958
61501 15 $11.000 $2.200 $8.800 $6.160 $2.640
61502 15 $11.000 $3.600 $7.400 $6.983 $417
61601 16 $20.000 $3.300 $16.700 $9.425 $7.275
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61602 16 $2.000 $600 $1.400 $1.607 ($207)

61603 16 $1.400 $1.000 $400 $1.827 ($1.427)
61701 17 $8.000 $2.100 $5.900 $5.973 ($73)
61702 17 $10.000 $2.500 $7.500 $6.290 $1.210
61801 17 $4.000 $1.600 $2.400 $1.753 $647
61901 19 $2.000 $1.700 $300 $1.751 ($1.451)
61902 19 $12.000 $2.200 $9.800 $6.336 $3.464
62001 20 $0 $200 -$200 $553 ($753)
Idle time ($21.840)
Total $28.200
Rent unused floor space $13.000
Net profit $15.200

Table 1.3. Most Profotable Jobs

Job Net profit (Loss) Explanation

61202 $10.163 Most Profitable

61203 $8.416
61204 $7.278
61601 $7.275
61003 $5.487
61101 $5.193
61102 $4.637
61201 $4.176
61902 $3.464
61501 $2.640
61405 $1.958
61702 $1.210
61401 $975
61404 $771
61801 $647
61502 $417
Job Net profit (Loss) Explanation
61701 ($73)
61602 ($207)
62001 ($753)
61002 ($1.153)
61402 ($1.405)
61603 ($1.427)
61901 ($1.451)
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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 QUALITY TOTAL
JOB SCANNING ASSEMBLY OUTPUT MATERIAL
PREPARATION CONTROL COST
61001 0 $1.606,15 $722,59 $592,79 $172,64 $2.700 $5.794
61002 0 $803,07 $433,56 $592,79 $258,97 $1.100 $3.188
61301 $147,64 $501,92 $722,59 $296,39 $172,64 $1.000 $2.841
61502 $73,82 $401,54 $578,07 $148,20 0 $1.500 $2.701
61801 0 $100,38 $216,78 $148,20 0 $1.000 $1.465
61901 $73,82 $100,38 $289,04 0 0 $1.000 $1.46
TOTAL $17.454

Table 1.5. Quality Control Initiated Rework of House Errors

JOB QUALITY TOTAL
JOB SCANNING ASSEMBLY OUTPUT MATERIAL
PREPARATION CONTROL COST
61301 $73,82 $301,15 $289,04 $148,20 $86,32 $1.000 $1.898
61402 $903,46 $1.156,15 $296,39 $172,64 $1.000 $3.528
61403 $1.003,84 $1.011,63 $296,39 $86,32 $1.000 $3.398
61603 $73,82 $301,15 $216,78 $148,20 $500 $1.239
TOTAL $10.065
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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 can’t 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

FIRST PRICE/PAGE
PRICE/ REWORK MINIMUM
JOB PAGES OH AFTER
PAGE COST PRICE
COST REWORK
61001 $600 16 $8.332 $5.794 $14.126 $883
61002 $600 16 $7.253 $3.188 $10.441 $653
61402 $500 16 $6.305 $3.528 $9.833 $615
61403 $500 16 $5.612 $3.398 $9.010 $563
61603 $350 4 $1.827 $1.239 $3.066 $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