Your response should be formatted using the Situation, Analysis, Conclusion, and Impact approach of the CPA Way.$$

SITUATION $$ STUDENT RESPONSES

$1)$ Silk Screen Inc. is a company that sells t$-$shirts with custom logos$.$ While the business has grown, you face an issue in that you charge flat fee, no matter the difficulty or length of the design process. This has decreased his margins and forced him to look for a better way to price his products. We have been tasked to create a job$-$order costing system to help increase the profitability of each order you receive.

$2)-$ His business serves university teams, clubs, and other organizations, providing silk$-$screened T$-$ shirts with custom designs.

$-$ Profit margins are shrinking as he does not price$-$discriminate Charges flat rates and does not vary prices for variable effects

$3)$ Scott is concerned that using the same price for orders, regardless of the type of ink used or intricacy of the shirt designs, is hurting his profits.

ANALYSIS

Consider the directions$/$required in the case. The elements $($a $$ d$)$ suggest this path forward to address the client$$s issues.

The analysis :

should help you address the situation you identified

may include quantitative and qualitative analysis Incorporate technical skills with case facts

Analysis

A$)$ PROFIT MARGIN

Takeaways:

Customer $1$ is more complex, is more expensive to serve, and would lose Silk Screen money based on current pricing system

Customer $2$: basic order therefore less costly to fulfill

This confirms the concerns Scott had $$ reinforces the need for a new approach.

B$)$ SUGGESTED SELLING PRICE: ALTERNATIVE $1$

Customer $1$

Customer $2$

Takeaways:

Customer $1$s Selling price would increase under new system. Can you explain why?

Customer $2$s Selling price would decrease.

Do mark ups equal profit margin?

SUGGESTED SELLING PRICE: ALTERNATIVE $2$

Cost $/(1$ profit margin$)=$ selling price

Customer $1$:

$29\mathrm{.}75/(1-\mathrm{.}25)=$ $$39\mathrm{.}67$

Customer $2$:

$19\mathrm{.}50/(1-\mathrm{.}25)=$ $$26\mathrm{.}00$

C$)$ SHOULD SCOTT INCORPORATE DESIGN AND STENCILING COSTS INTO HIS PRICES?

$$ Scott$$s time is being used with these jobs

More complex design, requires more time

Using a computer$/$technology for this process

$$ Cost$/$benefit of collecting this information

$$The costs for silk screening relate to time to develop...$($paragraph $4)$ Yes or No $$ and more importantly why$/$why not

D$)$ FACTORS TO CONSIDER IF HE REFINES HIS JOB$-$ ORDER COSTING APPROACH?

Design complexity

Volume of ink used $($currently just an average$)$

Volume discounts

Labour costs $($if he incorporates his time$)$

Overhead application

Reactions from customers $$ costing leads to pricing $($in business for $3$ years...$)$ Competition

Other?

CONCLUSION

Scott should adopt a new costing system $$ Reflects operations

$$ Accurate

$$ Ensures appropriate pricing

You conclusion:

$$ Clear and concise

$$ Expanded bullet points are acceptable $$ Address the situation identified

CONCLUSION

Student response:

Scott should look to move away from his current pricing model, and he should move towards a pricing model that takes into account the cost of the intricacy and inks used in each design. To do this, Scott should develop a pricing model that better compensates him for the specific costs incurred because of the types, quantities, and varieties of ink used as well as level of complexity of the designs.

To address the shrinking profit margins, Scott needs to move to a job$-$order costing system that allocates costs based on the specific requirements of each order$$type of T$-$shirt, number of ink colors, and ink costs. This will allow Scott to price his products more accurately and ensure that complex designs are not underpriced.

IMPACT

The Impact should: $$Reflect the conclusion $$Make the recipient care

The Impact of switching to a new cost system:

$$Better understands costs so he can assist his customers $$Accurate understanding of margins $($good for business$)$Help with concerns on shrinking margins

$$May be some hiccups in the implementation

$$Customer response

IMPACT $$ STUDENT RESPONSE

Accurate Pricing: Prices will reflect the true cost of production, especially for complex designs, ensuring that Scott does not lose money on intricate orders.

Profitability: Scott will be able to meet his goal of a $25\%$ profit margin on cost$,$ creating a more sustainable business model.

Customers: Scott may have to have conversations with customers about increased prices and may risk losing some customers

Business Growth: With better control over costs and margins, Scott can focus on expanding his business without compromising profitability, ensuring long$-$term success.

OR:

The impact this will likely have is to increase Scott$$s profits. This will be the case so long as it does not lead to a reduction in sales large enough to hurt the bottom line further.

Your response should be formatted using the Situation, Analysis, Conclusion, and Impact approach of the CPA Way.