Prepare a suggested price list for the atlanta area

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Reference no: EM13304165

Atlanta Bottling Company

In November 2012, James Robertson, Vice President of the Atlanta Bottling Company, was wondering what pricing strategy he should recommend to his father. Located in Atlanta, Georgia, Atlanta Bottling began operations as a bottle distributor in 1909. Distributors maintain a close working relationship with several major bottle manufacturers (e.g., Owens-Illinois). In return for acting as a sales representative, distributors receive a discount of 5-8 percent off regular prices. This permits distributors to charge users of bottles the same price as if a purchase were made directly from the manufacturer.

Typically, distributors maintain a warehouse with an inventory of commonly used bottles and closures. For special or large orders, distributors arrange for an order to be shipped directly from the manufacturer to the distributor's customer. The manufacturer bills the distributor at factory price less 5-8 percent, and the distributor bills the user at factory price. The advantages for the manufacturer are that a smaller sales force is required and that the distributor will service accounts too small to be served by one manufacturer. The advantages to the user are that the distributor can provide immediate delivery of many items, can offer the advantage of greater buying power, and can serve as an expert who is familiar with bottles and closures from many manufacturers.

In the past 20 years, the growing use of plastics had increased business for bottle distributors for at least two reasons. First, the choice of bottles had expanded greatly, making expert advice more valuable. The growing variety of caps, lids, and spray pumps handled by distributors began specializing in printing labels directly onto plastic bottles. For many users it was convenient to have both purchasing and printing of plastic bottles handled by one vendor.

THE FIRM

In 2011, Atlanta Bottling had total sales of $6.2 million, with $500,000 from printing operations. Although the printing operation was only marginally profitable, that service was considered essential for obtaining more profitable bottle sales. While he realized that printing should not be viewed solely in terms of its profits, Mr. Robertson felt that the firm was offering a valuable service and should price that service to earn a reasonable return.

Last year printing sales were $500,000, and we made $30,000. This year, with the economy worse, we'll sell $450,000 and about break even (Exhibit 1). We have capacity for $1 million. I'm not sure what to do. We're the leading firm in Atlanta; there is another firm here, about half our size. There's also a new small firm causing trouble with price cutting. Our main competitor has begun to cut prices as well. I hate to, but I have to do the same thing. What worries me is that I don't really know what my prices should be, or which prices to cut. We can charge a little more than the large bottle manufacturers, but not much.

Atlanta is still a good market even with the competition. There is some price cutting, but I know we can keep our market share. The market here, though, is primarily to industrial users. The real market is in Memphis, TN. That's where the cosmetics and pharmaceutical manufacturers are located. If we could get a couple of shampoo bottles, we'd really grow.

EXHIBIT 1

ATLANTA BOTTLING COMPANY

Income Statement--Printing Operations

10 Months Ended October 31, 2012








Variable with

Variable with




Machine-Hours

No. of Passes

Fixed

Sales Revenue

$379,880




Expenses:





Payroll

216,258

$161,258


$55,000

Supplies

12,458


12,458


Factory Expense

20,389

10,389

5,000

5,000

Machine Parts

4,457


4,457


Depreciation

22,505

17,505


5,000

Rent

23,770



23,770

Heat, Light, and Power

20,897


18,897

2,000

Health Insurance

19,176

14,000


5,176

Miscellaneous

7,933

7,933



Insurance

14,541

10,000


4,541

Payroll tax

17,793

13,000


4,793

Advertising

1,664



1,664

Total Expenses

381,841

$234,085

$40,812

$106,944

Profit (Loss)

($1,961)




Total machine-hours (including setup)

16,000



Variable cost per machine-hour


$14.63



Total passes



15,500,000


Cost per thousand passes



$2.63


PRICING

The bottle printing industry consists of two primary types of printers aside from distributors. Bottle manufacturers provide printing as a service to customers who purchase their plastic bottles. Price lists are published for printing, with the cost of scrap bottles included in the price. Discounts from the list prices are unusual.

The second class of printers is custom decorating houses. Price lists are rarely published, although custom pricing is similar to price lists published by bottle manufacturers, adjusted for difficulty of design. Small discounts, however, are widespread. Since printing is normally done on bottles supplied by the customer, the printer is not responsible for scrap costs, but does not receive a commission on sale of bottles.

Atlanta Bottling had far more printing capacity than needed to print bottles that the firm sold. Thus, Atlanta Bottling both published a price list for simple designs and acted as a custom decorating house with special pricing. As shown, in Exhibit 2, the price list of a major bottle manufacturer, prices are influenced by three factors: 

A. Bottle size (capacity in fluid ounces). Bottles are loaded onto a chuck, then rotated while a silk screen moves horizontally to print directly onto the plastic bottle. Since larger bottles take longer to print and require more warehouse space, prices increase as bottle size increases.

B. Quantity. Each run requires setup time to load ink and a silk screen onto a machine and to set the machine to accept a bottle. In addition, there may be a slight learning effect with each bottle. Thus, cost per bottle decreases as quantity increases.

C. Separations. "Separations" means the number of individual impressions required to print a single bottle. When round bottles are printed, they are rotated horizontally in place in the printing machine. A silk screen with the image to be printed is positioned above the bottle and slides horizontally, synchronized to move at the same speed as the surface of the bottle. Because it rotates 360°, a round bottle can be printed front and back in a single machine cycle; i.e., this is a one-separation or single "pass" operation. However, two-sided bottles (commonly called ovals) cannot rotate and thus, generally, only one side can be printed per pass. Printing both front and back of an oval usually requires the entire lot of bottles to be loaded and unloaded twice --- one pass per side, or a total of two separations. When decorating a bottle in multiple colors, the artwork must be separated into its color components and a separate screen prepared for each color. To decorate a round bottle in three colors, for example, requires three separate screens and three passes, whereas oval bottles require one screen and one pass per color, per side (a total of six separations, for a three-colored oval).

 

EXHIBIT 2

Printing Prices Charged by Industry Leaders




Price per Thousand (M) Bottles at Various Order Quantities




Order Quantity

Bottle Size (ozs.)

Under 10M

10M

25M

50M

100M

250M

One Separation







0-4.9

40.45

31.80

24.40

21.20

20.25

18.20

5-9.9

47.00

36.60

27.90

24.10

23.40

20.80

10-14.9

59.00

46.00

35.30

30.80

29.00

26.10

15-23.9

68.80

53.20

41.00

35.60

34.10

30.50

24-32.9

72.40

56.80

43.10

37.90

36.10

32.20

Two Separations







0-4.9

94.00

72.10

55.70

48.60

46.50

42.40

5-9.9

106.00

82.60

63.40

55.40

52.50

47.30

10-14.9

132.00

103.00

78.90

69.00

66.10

59.15

15-23.9

158.60

122.80

94.60

82.80

79.00

70.50

24-32.9

162.20

125.60

96.10

84.10

80.40

71.40










 OPERATIONS

The Atlanta Bottling graphics department included a camera and a developing lab for producing silk screens for printing. Since customers were charged separately for these services, that department was close to a breakeven operation.

Production operations consisted of 10 printing machines and 8 dying ovens. Bottles were loaded onto a machine for printing, then placed on a conveyer that carried those bottles through a drying oven. Two extra printing machines were available so that they could be rolled to the setup area and be prepared for a new job. This permitted greater utilization of costly ovens and the space they occupied.

Eight of the machines were semiautomatic. Each bottle had to be loaded into the machine and unloaded onto the dryer belt by hand. Ovals, as described above, had to be printed on one side,allowed to dry, then reloaded for printing on the reverse side. However, one machine had an automatic feature for oval bottles. An operator still had to load and unload that machine manually, but oval could be printed on both sides before being unloaded into the driving oven. The remaining machine was fully automatic. One operator loaded bottles into a feed hopper, whiles a second operator observed the printing operations for quality. Oval bottles could be printed on both sides in a single machine cycle and were automatically unloaded into the drying oven.

THE PROBLEM

Mr. Robertson asked Franklin Thomas, a consultant, to review the firm's pricing policy:  We publish a price for simple jobs printed on our bottles. Since we earn a commission on the bottles, prices aren't all that important for pricing. However, I'm not sure that the industry pricing is correct. Prices decrease with order size and increase with bottle size. I think that the decrease in price with the order size is reasonable, since we don't have to search for more business to keep our shop full if we have large orders. Bottle size pricing doesn't seem quite right, however. It does take longer to print a large bottle than a small one, but the difference isn't all that great. Maybe the price differential shouldn't be as large as it is.

A second factor is the new automatic machines that print both sides of an oval without reloading. Most of our competitors use semiautomatic machines. Maybe we shouldn't be charging as much for ovals with the new machines.

The final problem is our custom decorating. We are trying to expand in the Memphis, TN area, and almost all of the business we might get would be custom decorating. We should have no commissions on bottles, so our profit would be entirely from printing. We would also have to pay freight.

I would like to see our published price list revised to reflect our costs. However, I don't want it to vary greatly from the ones published by major manufacturers. I would also like to know variable cost for biding on custom decorating. That won't be published, since I have to adjust each price for difficulty of the order; but I'll use the cost list as a guide. Finally, I'd like costs adjusted for transportation to Memphis, TN. My goal is to earn 30 percent on sales before tax when we're at capacity.

Before preparing price lists, Mr. Thomas, Mr. Robertson, and the operations manager agreed that the scrap and shipping costs in Exhibit 3, and the operating information in Exhibit 4, would be used in pricing calculations.

EXHIBIT 3   Scrap and Shipping Costs





Cost of Scrap



One Separation


Two Separations



Cost of 2 Percent Lost Bottles (scrap)


Cost of 4 Percent Lost Bottles (scrap)

Loss of 2 Percent of Printing



Cost of 1,000 Bottles


Total Cost of Scrap

Size


0-1 oz

$70.00

$1.40


$2.80

$0.50

$3.30

1 1/4-4 oz

$84.00

$1.68


$3.36

$0.50

$3.86

5-6 oz

$94.00

$1.88


$3.76

$0.50

$4.26

7-10 oz

$116.00

$2.32


$4.64

$0.50

$5.14

11-12 oz

$125.00

$2.50


$5.00

$0.50

$5.50

13-16 oz

$130.00

$2.60


$5.20

$0.50

$5.70

17-32 oz

$145.00

$2.90


$5.80

$0.50

$6.30















Cost of Shipping to Memphis, TN Area



 Bottles per Truckload


 Cost per 1,000 Bottles




 Size





0-1 oz

1,040,000


$1.06




1 1/4-4 oz

280,000


$3.93




5-6 oz

190,000


$5.79




7-10 oz

145,000


$7.59




11-12 oz

120,000


$9.17




13-16 oz

86,000


$12.79




17-32 oz

42,000


$26.19














EXHIBIT 4

1. Cost per hour of setup time and of operating time are approximately equal.

2. Setup time for a job is approximately two hours per separation.

3. Average operating time for one-separation jobs on semiautomatic machines is approximately 0.95 hour per 1,000 bottles, regardless of quantity. Sizes 0-1 ounce and 17-32 ounces are approximately 5 percent slower than average (1.0 hour per 1,000),while all other sizes are approximately 5 percent faster than average (0.9 hour per 1,000).

4. Average operating time for two-separation jobs on semiautomatic machines is approximately 1.1 hours per 1,000 passes (2.2 hours per 1,000 bottles), regardless of quantity. Sizes 0-1 ounce and 17-32 ounces are approximately 10 percent slower than average (1.2 hours per 1,000 passes, 2.4 hours per 1,000 bottles), and other sizes 10 percent faster (1.0 hour per 1,000 passes, 2.0 hours per 1,000 bottles).

5. Average operating time for ovals on the semiautomatic machine feature for ovals is approximately 0.80 hour per 1,000 passes (1.6 hours per 1,000 bottles), regardless of quantity. Sizes 0-1 ounce and 17-32 ounces are approximately 10 percent slower than average (0.88 hour per 1,000 passes, 1.76 hours per 1,000 bottles), while all other sizes are approximately 10 percent faster than average (0.72 hour per 1,000 passes, 1.44 hours per 1,000 bottles).

6. The fully automatic machine is approximately twice as fast on rounds as the semiautomatic machines and approximately twice as fast on ovals as the semiautomatic machine with automatic feature for ovals. However, two people are required to operate the machine and it is approximately twice as costly to operate. Thus, this machine can be ignored for costing purposes.

QUESTIONS:

1. Calculate the variable costs per thousand bottles for one- separation rounds, two- separation rounds, and two- separation ovals, assuming that all ovals are printed on the machine with the automatic feature for ovals. Do one set of calculations for the Atlanta area (scrap included) and another for Memphis, TN (freight included, but not scrap). To keep the number of calculations you need to do within reason, consider only two bottle size rangers 0-1 ounce and 17-32 ounces- and only two quantity rangers- 5,000-9,999 and 100,000-249,999. (Together with the two sales areas, this results in 24 combinations for which to calculate variable costs.)

2. Prepare a suggested price list for the Atlanta area. Consider only one-separation rounds and two-separation rounds or ovals, and only the two sizes and order quantities described in question 1. How did Mr. Robertson's goal of a 30 percent margin (at capacity) affect your price recommendations?

3. Which products should the company attempt to sell in the Memphis, TN area? Explain.

Reference no: EM13304165

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