Ezprinting.

1

E-Z PRINTING COMPANY

(Job Costing for Pricing and Performance Evaluation)

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:

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

Mr. Hockman knew that the company’s problem must be...