Cost and Overhead Costs

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1. Why would any customer, let alone large advertising agencies and departmental stores, go to Colorscope rather than go to large printers listed in Exhibit 3?

Before desktop publishing became popular, Colorscope had a competitive advantage through its expensive proprietary computer equipment that could produce complicated print special effects. Colorscope had also been able to build strong relationships with valuable customers through the years and had a good reputation for providing high quality work in its field.

Another reason why Colorscope could compete with the large printers was the high fragmentation of the pre-press industry. This was due to the fact that most pre-press companies focused on just a few print products (e.g. catalogs, newspapers or coupons) and had strong specialized expertise in these. Because of that, Colorscope could provide higher quality than the large printers in the fields where it had specialized. Before the dawn of desktop publishing, which led to commoditization of the services, competition was more based on quality than on price.

As a small agency, it is also probable that Colorscope could be more flexible in meeting specific demand and provide more tailored services to the few customers it served, compared to the large printers which would have a bigger and more bureaucratic organization.

3. What you have done above is a “full-cost” analysis. This is in contrast to a “direct-cost” analysis that ignores overhead costs. Is full cost the right metric for job profitability and customer profitability? What assumptions are we making about the variability of overhead costs when we do a “full-cost” analysis?

By allocating the overhead costs to jobs and customers there is an implicit assumption that these are variable with the cost driver. In reality, some of the overhead costs are fixed, at least in the short run.

One benefit of using full cost is that the price charged for jobs needs to recover all costs...
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