Erica Carson We will do it for 10 percent less than what you

Erica Carson “We will do it for 10 percent less than what you are paying right now.” Erica Carson, purchasing manager at Wesbank, a large western financial institution, had agreed to meet with Art Evans, a sales representative from D.Killoran Inc., a printing supplier from which Wesbank currently was not buying anything. Art Evans’s impromptu and un- solicited price quote concerned the printing and mailing of checks from Wesbank. Wesbank, well known for its active promotional ef- forts to attract consumer deposits, provided standard per- sonalized consumer checks free of charge. Despite the increasing popularity of Internet banking, the printing of free checks and mailing to customers cost Wesbank $8 million in the past year. Erica Carson was purchasing manager in charge of all printing for Wesbank and reported directly to the vice president of supply. It had been Erica’s decision to split the printing and mailing of checks equally between two suppliers. During he last five years, both suppliers had provided quick and quality service, a vital concern of the bank. Almost all checks were mailed directly to the consumer’s home or business address by the suppliers. Because of the impor- tance of check printing, Erica had requested a special cost analysis study a year ago, with the cooperation of both suppliers. The conclusion of this study had been that both suppliers were receiving an adequate profit margin and were efficient and cost-conscious and that the price struc­ ture was fair. Each supplier was on a two-year contract. One supplier’s contract had been renewed eight months ago; the other’s expired in another four months. Erica believed that Killoran was underbidding to gain part of the check-printing business. This in turn would give Killoran access to Wesbank’s customers’ names. Erica suspected that Killoran might then try to pursue these customers more actively than the current two sup- pliers to sell special “scenic checks” that customers paid for themselves.

1. What importance is the check printing to the bank?

2. How would you do a cost analysis on a check printing order?

Solution

(1)

For Wesbank, the check printing is a part of its competitive advantage. It helps its customers to fulfill their Self Esteem needs according to the Maslow\'s hierarchy of needs. Customers can use the customized check to pay their bills or pay anyone to establish a status symbol. The service is also provided to the customers free of cost to attract or retain the customers. Therefore, this is a service which helps in bringing additional revenue stream or cash flows for the company. It should thus be considered an important part of the business which the company may not want to stop in the future to promote digital banking.

(2)

We have to determine the direct labor hours and direct material cost associated with printing first. The direct labor hours are to be multiplied by the hourly rate of the workmen involved in the printing process. For the direct materials, the cost of purchase of material (paper, ink and so on) has to be noted. Such information will be available directly for the purchase orders placed with the tier 1 suppliers of the check printing vendors. After that, the variable overheads will be calculated based on the machine hours consumed with printing. The technology of printing has to be noted carefully in that the variable overhead will be a function of technology. Normally, the technology vendors will provide an estimate of per print cost which can be used as an estimate for the variable overhead. Finally, the fixed overheads are to be apportioned based on the complexity of printing these checks and that of other jobs of the supplier. Different cost drivers can be used to apportion the fixed overheads of different categories.