OPERATING DECISIONS 137
Case study: Quality Printing Company – pricing for capacity
utilization
Quality Printing Company (QPC) is a listed PLC, a manufacturer of high-quality,
multi-colour printed brochures and stationery. Historically, orders were for long-
run, high-volume printing, but over recent years the sales mix has changed to
shorter runs of greater variety. This was reflected in a larger number of orders
but a lower average order size. Expenses have increased throughout the business
in order to process the larger number of orders. The result was an increase in
sales but a decline in profitability. By the latest year, QPC had virtually no spare
production capacity to increase its sales but needed to improve profitability. The
trend in business performance is shown in Table 9.9.
An analysis of these figures shows that while sales have increased steadily,
profit has declined as a result of a lower gross margin (materials and other costs
have increased as a percentage of sales). QPC noticed that the change in sales
mix had led not only to a higher material content, and therefore to more working
capital, but also to higher costs in manufacturing, selling and administration, since
employment had increased to support the larger number of smaller order sizes.
An analysis of the data in Table 9.9 is shown in Table 9.10.
A throughput contribution approach that calculates the sales less cost of
materials and relates this to the production capacity utilization shows how the
contribution per hour of capacity has declined. This is shown in Table 9.11.
As a result of the above analysis, QPC initiated a pricing strategy that
emphasized the throughput contribution per hour in pricing decisions. Target
contributions were set in order to force price increases and alter the sales mix to
restore profitability.
Unfortunately, the change had no time to take effect as QPC was taken
over by a larger printing company. The larger company was aware of QPC’s
Table 9.9 Quality Printing Co. – businessperformance trends
Last year One year ago Two years agoSales 2,255,000 2,125,000 2,000,000
Variable production costs:
Materials 1,260,000 1,105,000 980,000
Labour 250,000 225,000 205,000
Other production costs 328,000 312,000 295,000
1,838,000 1,642,000 1,480,000Contribution 417,000 483,000 520,000
Fixed selling and administration expenses 325,000 285,000 250,000
Net profit 92,000 198,000 270,000
Production capacity utilization (hours) 12,100 11,200 10,500