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Image Is Everything, Inc. (IIE) is located in an rising market.  It focuses in lithographic duplication, catering to demands from the nouveau riche for reproductions of paintings by artists like Rembrandt, Picasso, Van Gogh, etc.  Being the only game in the country, where millionaires are born every minute, IIE finds that demand outstrips capacity.  IIE has a demand for 750 reproductions (jobs) every month.  It charges $500 per job.

The painting reproduction process involves two steps, a “Preprint” step (the PP step), followed by a “Makeready & Print” step (the MP step).  The footnote briefly describes these steps.  Both the PP step and the MP step need expensive, difficult-to-acquire, equipment and IIE has somehow smuggled one of each into the country.  Each step needs a skilled artist.   IIE operates two 10-hour shifts each day, 25 days a month.  Each of the 4 artists employed full-time by IIE is paid $100 per day, and reports for work every day without fail.  Fixed cost expenses for supervision, rent, and so on, amount to $10,000 per month.  Cost of materials (inks, paper, solvents, etc.) adds up to $100 per job.

PP step takes one hour on average.  The equipment for this procedure step breaks down often, and it is therefore unavailable for 20% of the time.  Fortunately, these breakdowns don’t affect the quality of a job in process.  Hence, as soon as the equipment comes back up, job continues from whatever stage it was in before breakdown, without any problem.

MP step needs a setup time (“Makeready” time) of 15 minutes per job followed by the print operation which takes 30 minutes per job.  Additionally, artist executing this step spends one hour at the start of the shift to flush out all the ink from the equipment’s printing plates.

a. What is the monthly operating profit for IIE?

Mike’s Mechanics, a renowned maintenance company, gives two services to improve IIE’s productivity.  For a fee of $5,000 per month it guarantees reducing downtime at the PP step from 20% down to 10%.  Another service given is to install a new Makeready process for a one-time fee of $20,000 that would efficiently eliminate both the setup activity needed at the starting of each shift as well as the setups that should be performed for each job.

b. Should IIE contract with Mike’s Mechanics for either of these two services?  If so, which one(s) should it prepare the contract for and what is the new monthly profit?

Snobs, Inc. is a company located near IIE.  It approaches IIE for a job that only requires use of the MP process.  Snobs wants to contract for as many jobs as IIE can handle over the foreseeable future and offers to pay $200 per job.  Snobs would provide all the material required at no extra cost.  Each of Snobs’ jobs requires 30 minutes from the MP process.  Suppose that the MP process is extremely flexible and can switch between the reproduction work and Snobs’ jobs without any setup delays.  Suppose that the quality of reproductions is not degraded if there are any delays between the PP step and the MP step.  Also assume that  processing times are deterministic and so you can load both equipment (PP and MP) to their full capacity without degrading service.

c. Given this new demand, what must IIE do regarding its contract with Mike’s Mechanics?  How much more money could it make per month, if at all?

d. IIE is aware that Snobs is in desperate need for capacity, and that it could demand a higher price per job from Snobs.  At what price will it become attractive for IIE to abandon its present reproduction jobs (which need both the PP and the MP processes) and dedicate all its capacity to cater to demand from Snobs?

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M91651

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