Question

For 30 years, Ron Porter has owned and operated Celtic Adventure Camp on the Bruce Peninsula, where year-round campers come to play sports, make friends, and develop leadership skills in an outdoor setting. The camp has built a loyal following with many campers returning year after year. An effort that Ron Porter believes has been critical in building loyalty is Celtic’s practice of sending free T-shirts to camper’s homes with the year and the name of the cabin in which the person stayed printed onto the shirt.

Ron has been purchasing the T-shirts and doing the printing in-house since the camp began this effort 10 years ago. Earlier this year, he hired a consulting firm to help him find external companies that could do the purchasing and printing, and mailing the shirts to the campers. Production volume is expected to be 9,000, 10,000, or 11,000 shirts per year with a higher probability of production being 10,000 or 11,000 units. The consultant was paid $4,500 to complete the study and provide a report.

There are currently 3 one-month production runs and mailings of the shirts. The production runs occur after each camp session and are in September for the summer campers, in January for the fall campers, and in May for the winter campers. The shirts are mailed October 1, February 1, and June 1. The summer attracts the largest number of campers, with the fewest visiting in the winter. The ratio of production and mailing of the shirts for the summer, fall, and winter is expected to be 4:3:1, respectively. It is very important that the shirts be sent on time, given that emails for the following year’s registration are sent two weeks after the mailing of the shirts, just before other camps in the area send out their registration materials. Ron believes that, having just received T-shirts in the mail, campers are far more likely to respond to the registration emails with plans to return and prepayments. The close timing of the T-shirts and the registration emails, Ron believes, plays a large role in Celtic’s high number of returning campers each year.

The camp’s printing facility has the capacity to produce 2,500 shirts per month with no overtime, and with its own people. Production beyond 2,500 units requires overtime hours at the overtime rate. The production staff members, who can each complete 350 printed shirts in 40 hours, are paid $12.50 per hour for regular time and double time for any overtime. The time needed to organize camper data and design shirts limits production time to one month. This time limit and the critical need to have the T-shirts ready by the last day of the month very often results in a lot of overtime. The material costs for the shirts are $9.50 per shirt. Experience reveals that variable overhead is 12% of labour costs and fixed overhead has been $9,500 per year. In prior years, area businesses have asked Ron to produce a small number of shirts for their employees and customer promotions in the off-season. This activity is expected to continue and has generated $5,000 of annual revenue.

The consultant report paid for by Celtic Adventure Camp recommended two suppliers, with both potential suppliers offering to also mail out the shirts. The first is Scott’s Printing, which will provide any quantity up to 9,000 a year for $12.80 per shirt. As volume increases above 9,000, the per-unit cost will decrease. Specifically, for each 1,000-unit increment, the price per unit will drop by $0.50 per unit so that an order of 11,000 shirts will be priced at $11.80 each. If Celtic chooses this option and outsources all of their production, they will eliminate all of the annual
4

internal fixed costs related to this activity. The report also stated that Scott’s Printing is noted for its quality (superior to Celtic’s historical in-house results) and a dependable on-time delivery record. The report also said, however, that management of the firm is inflexible and difficult to work with at times.

The other firm recommended in the consultant report is Peninsula Printing. Peninsula’s pricing is structured a little differently. This firm sets a fixed price per year of $37,000, plus $10.00 per shirt, up to a volume of 9,000. Beyond the 9,000-unit volume, the price would decline by $0.75 for each additional 1,000 units produced. Therefore, at a volume of 11,000 units, Celtic would be charged $8.50 per unit plus $37,0000. This option also results in an elimination of the annual fixed costs if all production is outsourced. Peninsula Printing is new to the area but in other markets where it currently operates it is well regarded.

Required:

(A) Following the six-step Decision-Making model, recommend whether Celtic Adventure Camp should outsource the T-shirt printing and mailing process. If so, which outsourcing contract should be accepted?

[Hint: Compute the costs associated with producing 9,000, 10,000 and 11,000 units.]

Answer 1

Step 1:

Define – The problem here is of cost optimization, inbounded constraints of meeting the demand obligations. there are two options there first is to produce in-house and second to outsource. for outsourcing, again there are alternatives, namely making a choice between 2 suppliers namely Scott’s Printing and Peninsula Printing.

Step 2:

Criteria set – Cost Optimization for meeting the demand obligations. To evaluate criteria for each of 3 levels of demand, namely 9,000, 10,000 and 11,000 units of shirts.

Step 3: Identification of Alternatives :

Demand Ratio is 4:3:1 for Summer, Fall & Winter respectively. Therefore Demand Breakup is given below in the given ratio:

In – House Production Cost Table

Scott Printing Cost Table

Peninsula Printing Cost Table

Since Peninsula Printing Cost is higher at all levels of demand, hence it is rejected at this stage.

Step 4:

Relevant Information Analysis.

1. Consultation Fee paid is $ 4,500 which is a sunk cost, hence ignored.

2. Fixed Cost Saving of $ 9,500, when outsourced is not relevant as it is applicable for all outsourcing decisions. For in-house & outsourcing analysis, a comparison was made on a Total Cost basis, hence not relevant.

3. Peninsula Printing’s cost is higher at all levels Hence not considered relevant for further analysis.

Step 5 :

Alternative Selection Analysis.

In House Total Production Cost for each Demand Level

conclusion:

1. For 9,000 & 10,000 units of demand, in-house production has a lower total cost, hence it can be considered for selection for revenue savings.

2. for 11,000 units of demand level, Scott Printing’s has a lower total cost, hence it can be considered for selection.

Step 6 :

Qualitative Analysis

It is mentioned that Scott Printing has better quality than in-house and effective and timely delivery. Thus, it can be considered for 9,000 & 10,000 units of production. However, on a strict cost control basis, the concluding part mentioned in step 5 should be considered.