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Throughput Accounting, Cost Accounting

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Image Is Everything, Inc. (IIE) is located in an emerging market. It specializes in lithographic duplication, catering to demands from the nouveau riche for reproductions of paintings by artists such as Rembrandt, Picasso, Van Gogh, etc. Being the only game in the country, where millionaires are born every minute, IIE finds that demand outstrips capacity. IIE has a demand for 750 reproductions (jobs) every month. It charges $500 per job.

The painting reproduction process involves two steps, a “Preprint” step (the PP step), followed by a “Makeready & Print” step (the MP step). The footnote briefly explains these steps. Read it later if you wish to; you do not need to read it for this assignment. Both the PP step and the MP step require expensive, difficult-to-acquire, equipment and IIE has somehow smuggled one of each into the country. Each step requires a skilled artist. IIE operates two 10-hour shifts each day, 25 days a month. Each of the 4 artists employed full-time by IIE is paid $100 per day, and reports for work every day without fail. Fixed cost expenses for supervision, rent, etc., amount to $10,000 per month. The cost of materials (inks, paper, solvents, etc.) adds up to $100 per job.
The PP step takes one hour on average. The equipment for this process step breaks down frequently, and it is thus unavailable for 20% of the time. Fortunately, these breakdowns do not affect the quality of a job in process. So, as soon as the equipment comes back up, the job continues from whatever stage it was in before the breakdown, without any problem.
The MP step requires a setup time (“Makeready” time) of 15 minutes per job followed by the print operation that takes 30 minutes per job. In addition, the artist executing this step spends one hour at the start of the shift to flush out all the ink from the equipment’s printing plates.
a. What is the monthly operating profit for IIE?

Mike’s Mechanics, a reputed maintenance company, offers two services to improve IIE’s productivity. For a fee of $5,000 per month it guarantees reducing downtime at the PP step from 20% down to 10%. The other service offered is to install a new Makeready process for a one-time fee of $20,000, which will effectively eliminate both the setup activity required at the beginning of each shift as well as the setups that must be performed for each job.

b. Should IIE contract with Mike’s Mechanics for either of these two services? If so, which one(s) should it write the contract for and what is the new monthly profit?

Snobs, Inc. is a company located near IIE. It approaches IIE for a job that only requires use of the MP process. Snobs wants to contract for as many jobs as IIE can handle over the foreseeable future and offers to pay $200 per job. Snobs will provide all the material needed at no extra cost. Each of Snobs’ jobs requires 30 minutes from the MP process. Assume that the MP process is extremely flexible and can switch between the reproduction work and Snobs’ jobs without any setup delays. Assume that the quality of reproductions is not degraded if there are any delays between the PP step and the MP step. Also assume that processing times are deterministic and so you can load both equipment (PP and MP) to their full capacity without degrading service.

c. Given this new demand, what should IIE do regarding its contract with Mike’s Mechanics? How much more money can it make per month, if at all?

d. IIE is aware that Snobs is in desperate need for capacity, and that it can demand a higher price per job from Snobs. At what price would it become attractive for IIE to abandon its current reproduction jobs (which require both the PP and the MP processes) and dedicate all its capacity to cater to the demand from Snobs?

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