Process Based Costing

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Colorscope Inc

Which jobs are profitable for Colorscope? Why?

Jobs where there are rework (customer initiated or not) always result in losses. Therefore, if the incidents of house errors are reduced, profitability of Colorscope can be improved (our team note that this impact is small), and if customer initiated rework is charged to the customers at a price that commensurate with the cost incurred, profitability of these jobs can be maintained.

Most of the jobs that Colorscope completed are profitable. If their pricing can be maintained and their cost structure improved, Colorscope’s business model looks sound in the short run. Jobs #61001, #61002, #61301 and #61901 recorded the highest losses Efforts should be made to price customer initiated reworks that are incidental to #61001, #61002 and #61901 so they return to profit. If Colorscope is unable to charge a higher price in the short run and in the absence of other more profitable jobs, Colorscope should reject #61001 and #61901 but proceed with #61001. The former two brings in less revenue than their variable cost. Job #61301 is a loss making job as it consumed relatively higher labour and material cost compared to its revenue generated. As Colorscope has limited pricing power, it may not be able to defray some of its costs by passing them to customers even if the rework is customer initiated. Considering the resource intensity of this job, (almost 20% of Colorscope’s labour cost is consumed for #61301), the possibility of reducing cost of rework due to in-house errors is likely to be limited. Thus, return to profitability for this job is low. Colorscope’s bottomline will be better off if it rejects #61301 and reallocates resources to take on other more profitable jobs. However, even if Colorscope is unable to increase prices charged in the short run and in the absence of other more profitable jobs, it should continue to take on #61301. In the long run, if fixed cost can be reduced, #61301...
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