John Johnson hung up the phone and began to contemplate the offer he had just received. Abbie Jenkins, a friend of Johnson’s and the owner of a small company in nearby Keswick, Virginia, had just called to see if Johnson’s printing company, FinePrint Company, could accommodate a special printing order next month.
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 25,000brochures 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 that $10 per 100 brochures on this job. If you can’t do it for that, I’ll have 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 product off the ground. I suspect this will be the last for a long while.” John knew he didn’t have the capacity at the moment to handle the special order. And, $10 per 100 brochures sounded low. John 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.” John realized that with this order he wouldn’t have to pay this 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.
FinePrint Company (A)
Summary of Monthly Operating Costs
Monthly costs at
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
Sales – variable 1,500 Sales – fixed 1,875 Corporate – fixed 3,750 Total non-manufacturing costs $7,125 Total costs $22,500