E-Z Printing Company Case

Deborah Carr, founder and president of E-Z Printing Company, was worried. The company was doing more business than ever before - sales were at an annual rate of about $625,000 a year, but operating profit had decreased slightly during recent months and the ratio of income to sales had dropped sharply. Ms. Carr wondered what had gone wrong and what she could do about it. She called in her chief (and only) accountant, Gene Hockman, and asked him to find out what was happening.

E-Z Printing did a general printing business on a customer order basis. Ms. Carr set the price to be charged for each job equal to 140 percent of the estimated cost of materials, which were paper stock used, plus $25 for each estimated labor hour. Straight-time wage rates had averaged about $8 an hour, and this formula seemed to provide an adequate margin to cover overhead costs and provide a good profit.

Most of E-Z Printing's work was done on the basis of predetermined contract prices. In bidding on these jobs, Ms. Carr applied her standard pricing formula to her own estimates of the amount of labor and paper stock the job would require. She prided herself on her ability to make these estimates, but she sometimes quoted a price that was higher or lower than the formula price, depending on her judgment of the market situation.

E-Z Printing's before-tax profit had fluctuated between 13 and 15 percent of net sales. The interim profit report for the first half of 1987 came as a shock to Ms. Carr. Although volume was slightly greater than in the first half of 1986, profit was down to 8.8 percent of sale, an all-time low. The comparison, with all figures expressed as percentages of net sales, was as follows:

Mr. Hockman knew that the company's problem must be either low prices or excessive costs! Unfortunately, the cost data already available told him little about the cost-price relationship for individual jobs. E-Z's operating costs were classified routinely into 20 categories, such as salaries, pressroom wages, production materials, depreciation, and so forth. Individual job cost sheets were not used, and the cost of goods in process was estimated only once a year, at the end of the fiscal year.

Detailed data were available on only two kinds of items: paper stock issued and labor time. When stock was issued, a requisition form was filled out, showing the kind of stock issued, the quantity, the unit cost, and the production order number. Similar details were reported when unused stock was returned to the stockroom.

As for labor, each employee directly engaged in working on production orders filled in a time sheet each day, on which (s)he recorded the time (s)he started on a given task, the times (s)he finished it or moved on to other work, and (in the case of time spent directly on a specific production order) the order number. His/her department number and pay grade were recorded on the time sheet by the payroll clerk.

Mr. Hockman's first step was to establish some overall cost relationships. Employees for example, fell into three different pay grades, with the following regular hourly wage rates:

These rates applied to a regular workweek of 40 hours a week. For work in excess of this number of hours, employees were paid an overtime premium of 50 percent of their hourly wage. Overtime premiums were negligible when the work load was light, but in a normal year they averaged about 5% of the total amount of hourly wages computed at the regular hourly wage rate. In a normal year, this was approximately 40 cents a direct labor-hour.

In addition to their wages, the employees also received various kinds of benefits, including vacation pay, health insurance, and old-age pensions. The cost of these benefits to E-Z Printing amounted to about 70% of direct labor cost, measured at regular straight-time hourly rates. The overtime premiums didn't affect the amount of fringe benefits paid or accrued.

Mr. Hockman estimated that all other shop overhead costs--that is, all copy department, composing room, and pressroom costs other than direct materials, direct labor, overtime premiums, and employee benefits on direct labor payrolls--would average $4 a direct labor-hour in a normal year.

Armed with these estimates of general relationships, Mr. Hockman proceeded to determine the costs of several recent production orders. One of these was Job No. A-467. He had bid $1800 for the job, based on 45 labor hours and $480 on paper.

Exhibit A: Partial List of Material Requisitions
(for the week of April 3-7)

Req. No.	Job No.	Amount*
4058	A-467	$300
R162	A-469	(20)
4059	A-467	60
4060	A-442	6
R163	A-455	(10)
R164	A-472	(8)
4061	A-467	36
R165	A-465	(12)
4062	A-467	96
4063	A-471	320
4064	A-473	264
4065	A-458	22
R-166	A-467	(32)
4066	A-481	176

Exhibit B: Partial Summary of Labor Time Sheets
(for the week of April 3-7)

Employee No.	Pay Grade	Dept.	Job No.^a	Hours
14	2	Copy	A-463	6.6
14	2	Copy	A-467	1.4
15	1	Copy	A-467	3.3
15	1	Copy	-	2.7
15	1	Copy	A-467	8.8
18	3	Press	A-467	4.0
18	3	Press	A-472	4.6
22	1	Composing	A-455	3.8
22	1	Composing	A-467	8.4^b
22	1	Composing	-	1.5
23	2	Press	A-458	3.4
23	2	Press	A-467	4.7^b
23	2	Press	-	1.1
23	2	Press	A-459	2.5
24	2	Copy	A-470	7.4
28	1	Press	A-467	7.0
28	1	Press	A-458	1.0
31	3	Press	-	8.0
33	1	Composing	A-471	7.6
33	1	Composing	A-472	4.2
40	2	Press	A-469	3.6
40	2	Press	A-467	4.9
40	2	Press	-	0.2
43	1	Press	A-467	3.5
43	1	Press	A-481	5.8

^a A dash indicates time spent on general work in the department and not on any one job.
^b Employee No. 22 worked six hours of overtime during the week, none of them on Job No. A-467, while Employee No. 23 worked eight hours of overtime, including four hours spent on Job No. A-467.

	January 1	June 30
	1987	1986
Net Sales	100.0%	100.0%
Production Costs	77.6	72.3
Selling and Administrative Costs	13.6	13.9
Profit	8.8	13.8

Grade	Rate
1	$12
2	8
3	6