BULAKLAK FILMS, INC.

January 6, 2012

This paper recommends that the company should price its services to a lower rate than what the competitor is offering to be able to maintain a market share in the industry. The potential increase in sales for the coming years as a result of that can more likely cover up for the lost revenues due to the decrease in price. As regards the wage policy, it would be better for the company to maintain status quo and not to shift into the per footage basis computation of wage. This is more favorable to the company since there is more than insignificant increase in the volume of films processed for the past two years. Meanwhile, regarding the overhead cost allocation, it is deemed more appropriate to base the allocation on the normal running time of the processors rather than based on the revenue contribution of each process to avoid potential cost distortion. Background: Bulaklak Films, Inc. (BFI) exhibited satisfactory growth and a position of dominance in the film processing industry during the past years but is now faced with the problem of increasing competition among the firms in the said industry. To address this problem, BFIs Finance Manager, Mr. Buddy Ortiz, was asked by the President to prepare a performance analysis of the companys four profit centers: the black and white negative processing, black and white positive processing, color negative processing, and color positive processing sections. The color film processing was once monopolized by the company through intensive research and training of BFIs technical staff until other competitors offering lower prices entered the industry. Due to the possible price war within the industry, Mr. Ortiz was asked to analyze the companys elbow room. Statement of the Problem: How can BFI keep up with the increasing competition in the film processing industry? Can BFI consider lowering its rates, changing its wage policy from fixed per month to per footage basis, and making the companys credit extension policy more liberal to address the needs of the cash-short local movie producers without hurting its bottomline? Assumptions: y The forecast was based on the historical demand per month during 1994 and first two months of 1995. y The normal volume of production is the average volume of demand per month during 1993 and 1994. y One copy is equal to 12 rolls and each roll is a thousand feet long. y Labor cost is fixed and overtime pay is not taken into consideration due to lack of available data. Methodology A forecast of the volume of films to be processed for the year 1995 was made first in order to determine the trend of the incoming demand for the company. It was concluded thereafter that the volume will steadily increase for all the four profit centers. Next, the normal volume of production was assumed to be the average of the volume of films processed per month for the past 2 years. This normal volume per profit center was used to compute for the companys actual processing and printing costs that includes direct materials, direct labor and overhead costs. Direct materials for black and white and color film processing includes all the cost of chemicals while direct labor includes wages paid to personnel directly working in the processing and printing process. Direct labor also comprises salaries paid to operators, mixers, timers, printers and projectionists. Overhead costs compose indirect materials, salaries paid to other personnel and other expenses. Analysis and Conclusion: Bulaklak Films, Inc. currently implements a fixed salary policy, and it is still advisable to continue such policy. Looking at the derived normal or average volume of films processed for the past two years and the forecasted trend, there are a greater number of months processing a higher than average volume of films than months processing below average volume of films. The basis for the variable wage policy or per footage wage policy is the volume of films processed while the fixed salary policy will always remain constant regardless of the volume of films processed. Thus, it is evident that the variable policy will be more costly if the volume of films processed are increasing, and the fixed policy will be more advantageous if more volume of films are able to absorb the unutilized labor costs in the months that process films below the average volume. Assuming the fixed and the variable rate equal at the normal volume of films processed per month, the per footage salary policy tends to be more expensive for there are more months processing an above average volume of films. Hence, it is more favorable for the firm to carry on with their present salary policy. Fixed rate policy would be economical since the salaries paid would be constant even if the volume of films processed generate an increasing trend. The firms overhead costs are presently allocated according to the departments individual contribution to revenue. However, it is recommendable to use the normal running time of the processors as their allocation base. Seeing that the firms operations are geared towards the use of various machines or processors in the processing of films, then it is most appropriate to allocate overhead in accordance with the normal running time of the processors. Nevertheles, overhead costs that are particularly attributable to a specific department must be allocated to that department. Ultimately, it is recommendable that BFI price its services to a lower rate than what their competitor is offering. Both companies basically offers the same services; therefore, fees would be big factor in attracting more clients and a gaining a greater market share. A sudden decrease in their present fee would naturally decrease their revenues; nonetheless, this loss can be eventually be recovered by a larger volume of sales. In the current situation, BFI must set its pricing scheme lower than their competitors to compete in the industry.