Bluescope Inc Case Summary
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 …show more content…
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 should be
dropped.
What is the financial consequence of rework?
20654
What should Colorscope do about rework? How?
Quality control is only done at the end of the process, after the output is ready
If there are any internal errors, rework starts from as early as the scanning process and jobs after scanning process have to be repeated
Scanning & Assembly clocked the most no. of rework hours and hence rework costs. To concentrate efforts on these 2 processes.
Do a QC after the scanning process in order to cut down errors discovered in later processes. Deploy idle capacity to help with the additional QC.
To document down the internal production procedures for ease of review and reading by staff.
To conduct a yearly training to review and improve the procedures with reducing rework as the objective.
Customer initiated changes may be hard to control. To reduce tendency for such changes, Colorscope can have customer sign off confirmed specifications during preparation step.
Charge customers separately for significant changes from the signed-off specifications.
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 …show more content…
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 should be
dropped.
What is the financial consequence of rework?
20654
What should Colorscope do about rework? How?
Quality control is only done at the end of the process, after the output is ready
If there are any internal errors, rework starts from as early as the scanning process and jobs after scanning process have to be repeated
Scanning & Assembly clocked the most no. of rework hours and hence rework costs. To concentrate efforts on these 2 processes.
Do a QC after the scanning process in order to cut down errors discovered in later processes. Deploy idle capacity to help with the additional QC.
To document down the internal production procedures for ease of review and reading by staff.
To conduct a yearly training to review and improve the procedures with reducing rework as the objective.
Customer initiated changes may be hard to control. To reduce tendency for such changes, Colorscope can have customer sign off confirmed specifications during preparation step.
Charge customers separately for significant changes from the signed-off specifications.