Colorscope Case Analysis

Executive Summary
The current costing method that is being used is completely misrepresenting customer profitability and costs of rework completed. Colorscope exhibits a flawed pricing strategy, inaccurate financial reports and losses to the company as a result. Using a more relevant costing method has proven that Colorscope is losing money through missed opportunities for jobs with extra client demand and rework costs. This affects management who rely on this information for strategic planning. By attaining more accurate information, the pricing may be examined and adjusted to remain competitive with the smaller companies. In order to maximize efficiency and profitability, a new costing method must be implemented immediately.

Problem Identification
The problem facing Colorscope is the current costing system; it lacks operational efficiency which would more accurately determine pricing for quality projects. Analysis Colorscope Inc. has been using a pricing strategy that quotes customers with different demands at the same per page price. Customer scale, cost containment and efficiency are disregarded. Reducing the amount of rework completed by staff due to errors or due to change in customer demand is critical to containing costs put out by Colorscope. With its current approach, Colorscope incurs losses while at risk of losing prosperous relationships with customers.

One of Colorscope’s largest account representing 80% of their business, purchased their own graphic design and production equipment. Colorscope. Having lost the majority of the business, Colorscope is at risk of pressure to decrease their prices. The most beneficial solution to this problem is introducing activity based costing. This costing method can guide management when making business decisions on particular customers. From ignoring trends in the business, Colorscope became weakened by cheaper microcomputers because of the sophisticated layout and software that accompanied them. The smaller ad agencies and print shops were taking away business from larger graphic art companies such as Colorscope. This will make it difficult for Colorscope to create and maintain loyal customer relationships

Impact Analysis
By using a pricing strategy that does not accurately reflect the costs for customers with different demands, the organization cannot truly know the profitability of each customer and type of order. Bad pricing decisions can be made by not knowing how profitable each type of customer is. Colorscope is losing possible revenue by not adjusting prices based on the service needed. This can lead to inefficiencies as staff may put more work into one order while still incurring the same amount of cost as a less complex order. By not identifying specific activities that drive costs, Colorscope cannot determine which areas require improvement or why there was a sudden spike or drop in other areas. If the pricing method problem is not fixed, Colorscope will continue to see revenues decrease as more customers take their business elsewhere. Criteria for an Effective Solution

1. Cost
What is the cost of the alternatives?
2. Value
Does it add value for customers or the company?
3. Implementation
How easy is it to implement the new strategy?
4. Production/Output
How will production be affected?

Evaluation of Alternatives
Cost Containment
Colorscope needs to control their costs so that they can in turn be more profitable. In reviewing the costs and revenues of all of the projects this year many of them were costing Colorscope money, rather than earning money. One of the ways that they can control their costs is by reducing the amount of rework that is done on any project whether it is initiated by the customer or is fixing an employee error. In order to reduce rework initiated by the customer Colorscope would need to increase customer interaction during the process. So they would have employees involve the customers during the entire process so they can have a better idea of what the customer is looking for. For rework caused from employee errors they would need to implement different quality improvement techniques and possibly an incentive program for employees that have consistent high quality projects.

In order to keep costs under control Colorscope would need to also use an appropriate costing system such as ABC in order to have correct information on what a projects profitability would be before they actually complete the project. This will help them only work on accounts that will increase their net income. With costs minimized, demand will increase; production will increase causing idle time to lessen. Colorscope Inc. has made many relationships throughout it’s life and with this cost strategy, it will be able to stand out again not only by presenting high quality product but at a fair price.

Pros
Working closer with the customers will increase value for customers while reducing rework costs for the company. Will help them choose which projects to accept and which to reject. Produce quality projects and quality improvement techniques. Increase market share.

Cons
Keeping in contact with customers during the project will increase the amount of time needed to complete it.

Cost Plus Pricing
To have cost plus pricing Colorscope would still need to have a costing system such as ABC to determine the cost of a project before it is completed so they could have an estimate drawn up for their customers. They would charge the customer the cost plus markup that would always guarantee that they are making a profit on each project they work on, unlike what is currently happening. This type of pricing can work well in certain types of industries; unfortunately the market for graphic art has had increasing pressure to decrease prices. If Andrew Cha was to increase his prices and not lower his costs he would most likely lose many of his clients.

Recommendation
ColorScope needs to change its procedures in minimizing its cost. The cost containment strategy will allow the company to retain loyal customers by adding value to the product and keeping rework at a low. Colorscope will generate moderate sales in the short-term but in the long-run, the company will retain client relationships, produce at a higher capacity while adding value to the quality product. The main threat with this strategy is that different companies are competing on price but Colorscope continues differentiate it’s product as traditional and high quality.

Action Plan
Action Item
By Whom
When
Buy Direct Materials in Larger Batches.
Purchasing Manager/ Owner.
Right after costs are organized in a way to compete with competitors. Contact prior clients and let them know of the new pricing on products. Owner/ Purchasing Manager.
Once costs have been minimized to attract attention.
Reduce Rework
Customer Representative
As soon as possible
Invest in advertising
Selling Rep.
When proper job costs are allocated to specific jobs and costs can be more accurately measured. Purchase competing technology.
Purchasing Manager, Owner
ASAP, Colorscope can offer cheap quality prints like all the rest and for a slightly higher price offer a higher quality product that will wow it’s audience.