BULAKLAK FILMS, INC.

In April 1995, Mr. Pete de la Rosa President and Board Chairman of Bulaklak Films, Inc. (BFI),
consulted his two key operating managers. In the dialogue with the General Manager Mr. Bingo Estrada
and the Finance Manager, Mr. Buddy Ortiz, he expressed his apprehension on the increasing
competition offered by the other film processing firms.

To guide his decision making, Mr. de la Rosa asked Mr. Ortiz to prepare a performance analysis
of the company's four profit centers: the black and white negative processing, black and white positive
processing, color negative processing, and color positive processing sections. In addition, Mr. de la Rosa
wanted Mr. Ortiz to analyze for him the company's "elbow room" in the event of a price war.

COMPANY BACKGROUND

Although BFI had displayed what management thought was satisfactory growth and a position
of dominance in its industry in the past years, the problem of competition had become an increasingly
real issue. The black and white film processing had not really been dominated by the company but color
film processing was once monopolized by BFI.

It was not too many years back when local movie producers had to send their films to Australia
and Hongkong for color film processing - owing to the inability of local processors to meet even
minimum quality standards. Due to intensive research and training of BFI's technical staff, the
company's competence in color processing was soon established.

The past year, however, saw the entry of Image Duplicators and Exposures, Inc., two
competitors to BFI's color film processing operations. Exposures, Inc. particularly worried Mr. de la Rosa
because this competitor charged five percent lower than BFI's rates and was more liberal with their
credit extension policies - an extremely attractive proposition to the ever cash-short local movie
producers.

Mr. Estrada made inquiries about Exposures, Inc. and learned that one of the new company's
policies was to pay wage rates on a footage basis as against BFI's largely salaried stall. Mr. Oruz quickly
pointed out, however, that beyond a certain volume, the competitor's system was more expensive.

TECHNICAL BACKGROUND ON FILM PROCESSING

Film processing was a critical link in the movie production chain which consisted of: (1) film-
making (actual shooting); (2) negative processing; (3) editing; (4) positive printing and processing. (See
Exhibit 1). BFI's operation line started with the processing of exposed negatives brought by the
producer.

On the average, producers usually consumed 40 to 50 rolls, a thousand feet long each, of
negative stock (film) during the shooting. These exposed rolls were then processed, after which the film
was edited by the producer to eliminate the bad "takes". When sent back for printing, the film was
usually reduced to 10 to 12 rolls of film. Briefly, film processing consisted of three basic steps: negative
processing, editing, and printing (See Exhibits 2, 3, 4 and 5).

PROCESS COSTS AND RATES CHARGED

In the discussion with Mr. Estrada and Mr. Ortiz, Mr. de la Rosa stressed the importance of
knowing the company's actual processing and printing costs not only for profit study but also for pricing
purposes.

Since the establishment of the company, BFI had set its rates according to industry practices. In
color processing, for instance, BF1 charged no more than the final landed cost of films sent to Hong
Kong for processing. Exhibit 6 compares BFI's rates with the Hong Kong rates.

Mr. Estrada brought out the matter of rush orders which were not uncommon in the industry,
especially when film festivals were scheduled. It was BFI's practice to slap a 10% to 20% surcharge on
rush jobs. Mr. Estrada, however, doubted the adequacy of this rate to cover their actual costs
considering that rush jobs had to be done completely on overtime BFI operated on two 8-hour shifts but
it was often the case that people work for three shifts.

Exhibit 7 tabulated BFT's volume of jobs for the past two years. Mr. Ortiz knew that he had yet
to determine the “normal" volume of work for BFI before he could proceed to cost analyses. In addition,
Mr. Ortiz needed the actual operations cost: material, labor, and overhead expenses, and the number of
man hours involved in black and white as well as in color film processing. (See Exhibit 8).

The company records showed that the cost of chemicals used for black and white and color film
processing constituted BFI's direct materials expense (See Exhibit 9). As a company policy, all employees
were paid on a monthly basis (See Exhibit 10).

BFI'S COST ALLOCATION TECHNIQUE

BFI operated three major departments, of which the laboratory, where negative processing and
printing were carried out, was one. Mr. Ortiz's analysis of past company performance revealed that the
laboratory contributed an average of 90% of the company's gross revenue. Of this portion, the color
negative processing, color positive processing, black and white negative processing and black and white
positive processing contributed a total of 97% of laboratory revenue. Three percent (3%) came from the
laboratory's special services (e.g., cleaning, dubbing, and special effects) which were billed separately.

Revenue generated by the four processors was distributed as follows for a normal month: for
color negative - 17.9%, color positive - 69.8%, black and white negative - 2.8% and black and white
positive -9.5%.

It was the practice of the company's accountants to allocate most overhead items according to
the department's individual contribution to revenue. Thus, unallocable items in the laboratory expenses
were distributed according to income contribution except for such expenses as insurance and chemical
consumption.
 Exhibit 2

BASIC STEPS IN FILM PROCESSING

1. Negative Processing. This involved no more than immersing the exposed negatives in a series of
chemical solutions. The roll of film was fed into a take-up reel and then repeatedly immersed by
a series of rollers into a series of tanks. Each of the tanks had a chemical solution containing
anywhere from three to eight chemical compounds. These solutions differed in mixture for each
type of film to be processed (i.e. Black and White vs. Colored). There were variations in the
running time of the processors but the company had experienced a prevailing average rate in
the past. (See Exhibits 3, 4 and 5.)
2. Editing. The producer viewed the negative and cut out bad “takes” and unnecessary scenes. He
then spliced the film and sent back the reduced negative for printing. Anywhere from 6-11
copies were usually made.
3. Printing. For Black and White films, printing was simple. The negative were run through a printer
with the blank positive film to record the images. Simultaneously, the sound was superimposed.
(The sound negative was prepared in a separate department). Thus, the resulting positive print
contained both sound and image. This positive print (of which several copies were made) was
then sent to the positive processor for another series of dips in chemical solutions.

For colored films, printing included the following sub-steps: (a) Timing – checking of
color intensity and color density, and indicating the necessary filter shades to be used to correct
the color mix; (b) Filter arranging – addition of the necessary filter indicated by the timer to each
of the scenes in a roll of film; (c) Printing – image and sound transposition from the negatives to
the positive print; (d) Processing – another series of dips in the chemical tanks.
 Exhibit 5

NORMAL RUNNING TIME – PROCESSORS

Color Positive Processor 30 – 40 ft. /min.

Color Negative Processor 24 ft. /min.

B/W Positive Processor 50 – 60 ft. /min.

B/W Negative Processor 22 ft. /min.

Normal set-up time is 2 hours each day (6-day week) except on Mondays when 4-5 hours are needed.
Set up time in between reels of film is negligible.

Two operators per machine are needed.

Exhibit 6

FILM PROCESSING FEES – BFI VS. HONG KONG

(PER FOOT)

BFI (1) Hong Kong (2)

Color Negatives P 2.40 P 4.60

B/W Negative .60 2.10

Color Positives P 3.00 (1st three copies) P 5.20 (1st copy)

P 2.40 (next three copies) P 3.60 (2nd to 5th)

P 2.20 (Succeeding) P 3.10 (Succeeding)

B/W Positives P .50 N/A

(1) Processing fee only. Excludes Raw Stock.

(2) Equivalent landed fee (PHI) as of late 1994.
 Exhibit 7

VOLUME OF FILMS PROCESSED (1,000 Ft.)

Color Negative Color Positive B/W Negative B/W Positive

1993
Jan. 122 454 17 43
Feb. 130 368 18 51
Mar 164 480 18 54
Apr 153 512 22 55
May 166 500 24 64
Jun 147 954 20 68
Jul 143 347 26 96
Aug 154 655 29 85
Sep 165 722 24 87
Oct 168 700 21 93
Nov 170 740 20 92
Dec 167 718 24 93

1994
Jan. 169 700 25 101
Feb. 169 699 25 105
Mar 170 546 28 97
Apr 172 623 23 110
May 167 687 32 115
Jun 156 701 26 103
Jul 155 696 22 112
Aug 168 722 26 109
Sep 174 703 28 120
Oct 173 686 28 115
Nov 177 706 29 112
Dec 176 693 31 110

1995
Jan 177 659 27 101
Feb 178 681 30 65
 Exhibit 8

AVERAGE MAN-HOURS FOR OPERATORS PER FILM OF 10-12 ROLLS

Color Positives

Timer 40 – 50 man-hours

Filter Arranger 16 man-hours

Printer* 8 man-hours

B/W Positives

Timer 20 man-hours

Printer 8 man-hours

*Per Copy
 Exhibit 10

WAGES, SALARIES

Personnel Number Salary Item

Processor Operators 8 2,400/month plus overtime

Chemical Mixers 4 2,400/month plus overtime

Timers 4 3,500/month plus overtime

Printers 6 2,400/month plus overtime

Filter Arranger 2 3,000/month plus overtime

Projectionists* 2 2,400/month plus overtime

Salaries of other personnel, considered overhead amount to 30,000 per month, fixed, divided evenly
between printing and processing.

*The company has one projection room. Each copy of film processed (positive print) is normally viewed
for final inspection. Each film runs for about 2 hours on average.