For the exclusive use of T. Aldefa, 2021.

Indian Institute of Management A00001

Ahmedabad April 24, 2014

SPARK PUBLISHING AND PRINTING

HOUSE: SHORT-RUN MANAGERIAL DECISION
RAISES A ‘HAMLET-LIKE’ DILEMMA
It was a sunny Monday morning in March 2014. Sameer Sheth, the young and dynamic
proprietor of Spark Publishing and Printing House, was engrossed in the proposal his
management team had put before him. He was oblivious to both the rising temperature outside
and the serene coolness of his spacious, tastefully designed office. This was the first major
decision he had been required to make after taking over the reins of the family business from
his father in January, barely two months ago. He knew that all eyes would be on him. Apart
from the expectations of his employees, he also had the legacy of his father and grandfather to
consider. He did not want to fail either.

THE BACKGROUND

Spark Publishing and Printing House had very humble beginnings. Inspired by the Indian
independence movement led by Mahatma Gandhi in the late 1930s, Narottamdas Sheth
established Spark Printing Press, a small operation, near his mansion in Ahmadabad, in the
western Indian state of Gujarat. Though he had a degree in English Literature from England,
the political environment in India prompted him to start a Gujarati daily, NavoAwaj. After
independence, Narottamdas continued publishing the daily and also introduced an English
monthly magazine called Spark. His untimely death forced his only son, Sudhir Sheth, to quit
his studies in England and take on the responsibilities of the business. Sudhir had inherited his
father’s business acumen. He ventured into publishing, and Spark Printing Press became Spark
Publishing and Printing House (SPPH). The business expanded as SPPH began publishing
academic literature, technical manuals, religious publications and books by reputed authors. In
the publishing world, SPPH became a well-known name. Sudhir had one regret— that he had
to discontinue the daily and the magazine his father had started as both had become
uneconomical in the new business model.

Sudhir divided the business into two departments, one of which was Publishing and the other,
Printing and Distribution. The Publishing Department handled negotiations, editorial
responsibilities and design while the Printing and Distribution Department (P&D) dealt with
the printing, binding and distribution of published material. He had modernized the printing
department with the acquisition of a state-of-the-art printing machine at a cost of INR 2,000,000.

When his son Sameer returned from the United States with a management degree from a
prestigious institute, Sudhir decided to hand over the reins of the business to him. After a long

Prepared by Dr. Shruti Dave, Research Associate under the guidance of Prof Rajendra Patel, Indian
Institute of Management, Ahmedabad.
Cases of the Indian Institute of Management, Ahmedabad, are prepared as a basis for classroom
discussion. They are not designed to present illustrations of either correct or incorrect handling of
administrative problems.
© 2014 by the Indian Institute of Management, Ahmedabad.
This document is authorized for use only by Teuku Aldefa in 2021.
 For the exclusive use of T. Aldefa, 2021.

2 of 5 A00001

and successful business career, Sudhir intended to devote more time to his family and
rediscover long neglected hobbies.

Bowing to his father’s wishes, Sameer took over the business in January 2014. Over the next two
months, he tracked the trends and rapid changes in the publishing industry. The 21st century
had brought in a number of radical technological changes and innovations in publishing. With
the advent of digital information systems and the Internet, the scope of publishing had
expanded to include electronic resources such as e-books, micro-publishing, websites, blogs and
video game publishing, among others. On the printing front, many small companies providing
specialized printing and distribution facilities had emerged.

THE PROPOSAL

The proposal the company was now considering was from Fine Printing Press (FPP), which
offered to handle all of SPPH’s printing and distribution work for a monthly payment of INR
75,000. The initial contract period was for one year, after which it could be renewed with
mutual consent.

Sameer had always been more interested in the publishing side of the business, which he
regarded as “creative,” than the printing side. This proposal gave him the opportunity to
discontinue the P&D Department and concentrate entirely on publishing.

Sameer learned that another printing press had made a similar proposal to SPPH in the past
and that his father had rejected it. Sudhir’s reasoning at the time was that the printing press in
which he had invested had not fully depreciated. Further, the overheads allocated to the P&D
Department were considerable and would have to be dumped on the Publishing Department.
He was also reluctant to lay off Printing Department staff, some of whom had been appointed
by his father, Narottamdas.

Now, as he reviewed FPP’s proposal, Sameer decided to rethink his options. On the face of it,
the proposal looked very attractive. The total cost of running the P&D department was INR
85,000 per month (see Exhibit 1); whereas if SPPH outsourced printing and distribution to FPP,
it would be required to pay only INR 75,000 per month. However, Sameer had studied the
concept of “relevant cost” and knew that the correct way to evaluate the proposal was to make
a relevant cost analysis for and against closing down the P&D Department. Unlike his father, he
was not worried about the cost of the machine or overheads allocated to the department as he
knew that past costs and non-differential costs were irrelevant in managerial decisions and
must be ignored. But he was concerned about the retrenchment of staff, especially those who
had spent their entire working life serving the firm.

He decided to work out some acceptable arrangement so that the proposal could be analyzed
purely from a financial perspective. Sameer was sure of one thing. If he decided to outsource
the printing function after the analysis was completed, he would have to be sure of the quality
and efficiency of the printing and distribution services offered by FPP. In the publishing
business, SPPH commanded a lot of respect and he did not wish to do anything that could
tarnish its image.

This document is authorized for use only by Teuku Aldefa in 2021.

 For the exclusive use of T. Aldefa, 2021.

3 of 5 A00001

Sameer called for the previous year’s financial performance data (see Exhibit 1). With the
required figures at his disposal, he began analyzing the likely effect of the proposal on the
financials of the firm. He also had to consider the following information in making any decision
on the possible closure of the P&D Department:

1. From the P&D staff, Manek and Hiralal had been with the firm for almost 35 years. They
were due for retirement and would be entitled to collect on the firm’s Employee Pension
Plan in two years. If he decided in favor of closing the department, Sameer intended to give
each of them a pension equivalent to their present salary of INR 2,000 per month until they
became eligible for their pension. Two specialist staff of the P&D department would have to
be retained at their present salary of INR 4,000 per month in order to coordinate the work
with FPP.

2. The position of Publishing Department manager was likely to fall vacant. Sameer decided to
appoint Ashwin, the manager of the P&D Department, to that post. Though Ashwin had not
formally accepted the position, Sameer believed he would not oppose the transfer as the
manager of the Publishing Department was earning INR 6,500 per month, which was more
than Ashwin’s current salary of INR 6,000 per month.

3. The rest of the staff would have to be laid off. They were all contractual appointments.
According to the terms of their contracts, the firm would have to pay them 15 months’
salary as retrenchment compensation.

4. The P&D Department had a stock of printing material worth INR 90,000. FPP was prepared
to purchase the stock for INR 88,000. For the rest of the material it required, SPPH had
entered into an agreement with the supplier to ensure uninterrupted delivery. The
agreement included a cancellation penalty equivalent to 10% of the value of supplies
cancelled.

5. Depreciation expense included depreciation on machinery with an original cost of INR

2,000,000. The machine had been purchased 18 years earlier and had an economic life of 20
years; depreciation had been calculated on straight line method (SLM) basis. It could be sold
at scrap value, resulting in a loss of INR 75,000.

6. Depreciation on a distribution vehicle owned by the P&D Department was calculated on

written down value (WDV) basis. The written down value of the vehicle was INR 200,000.
FPP was prepared to pay INR 100,000 for the vehicle but Sameer was more inclined to hold
on to it for the company’s general use.

7. General overhead costs were head office costs allocated on the basis of the area occupied by
each department. Closing the P&D Department would make it possible to rent out the space
it occupied for INR 5,000 per month.

8. The P&D department had a five-year lease on a warehouse, with three years left on the
lease. Since it was not possible to cancel the lease, Sameer was left with two options if he
decided to close the department. He could use the P&D warehouse for the Publishing
Department and terminate its lease on the warehouse it was currently using. Since the

This document is authorized for use only by Teuku Aldefa in 2021.

 For the exclusive use of T. Aldefa, 2021.

4 of 5 A00001

warehouse being used by the Publishing Department was rented on a yearly basis, the firm
could save on the rent of that warehouse. The other option was to sublease the P&D
warehouse for INR 3,000 per month.

9. Other operating expenses included the administration and selling costs of the department.
In case of a temporary closure, expenses worth INR 15,000 would be unavoidable, but the
firm would not incur the rest of the expenses.

Sameer had asked FPP to give him a week to think about their proposal. Privately, he wanted to
outsource the P&D Department for one year but he knew that his final decision would depend
on the relevant cost analysis and the figures it showed.

This document is authorized for use only by Teuku Aldefa in 2021.

 For the exclusive use of T. Aldefa, 2021.

5 of 5 A00001

EXHIBIT I: COST STATEMENT FOR THE YEAR 2013*

(in INR)
Printing and
Publishing
SN Cost Particulars Distribution
Department
Department
1 Salary & Wages 340,000 288,000
2 Material & Supplies 170,000 340,000
3 Depreciation 115,000 150,000
4 Allocated General Overheads 85,000 115,000
5 Warehouse Rent 42,000 48,000
6 Other Operating Expenses 96,000 79,000
Total Expenses 848,000 1,020,000
*Summary of the cost statement of the Publishing Department and the Printing and Distribution Department for the
year ending December 2013.
Source: Case writers.

This document is authorized for use only by Teuku Aldefa in 2021.