Case of Colorscope Inc
By Patrick Nedved
Table of Contents
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.
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
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
What is the cost of the alternatives?
Does it add value for customers or the company?
How easy is it to implement the new strategy?
How will production be affected?
Evaluation of Alternatives
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...
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