A newspaper publishing company produces and distributes a magazine to its subscribers once each month. Although the company performs the entire publishing and distributing of the newspaper in-house, they have contacted with another magazine publisher to perform the printing and binding function for the magazine.
The contract for outside printing and binding of the magazine will soon expire and the newspaper company is reviewing its options. A member of the budgeting committee has reviewed the company’s financial reports and believes that the variable costs of producing the magazine could be significantly reduced by purchasing equipment to print and bind the magazine in house. However, in-house production would result in an increase in the company’s fixed costs.
Because of your background in cost accounting and cost management, the committee is looking to you for guidance in this decision. You have decided that helping the committee understand the types of analysis that should be employed in this situation will gain support for the action you recommend.
Prepare a report in which you:
- Explain the value of preparing a contribution income statement.
- Describe the concept of sensitivity analysis and explain the value of applying it during any budgeting process.
- Define operating leverage and explain how analysis of operating leverage alternatives would be applied to this decision.
- Describe strategic reasons why the company should bring printing and binding of their magazine in house.
- Describe strategic reasons for not bringing printing and binding of their magazine in house.
- Illustrate application of the five steps of strategic decision making for CVP analysis to this decision scenario.