Source: PCC Case (A), Exhibits 1–2
Tags: Purdy Call Centers, PCC, call centre outsourcing, cost accounting, service firm costing, outsourcing motivations, economies of scale, non-core competence, operator staffing, RRT, Response Resolution Team
Difficulty: Intermediate | Prerequisites: Introductory cost accounting concepts (direct vs indirect costs, overhead allocation, cost pools, cost drivers).
This case sits in the cost systems and overhead allocation portion of a cost accounting course. It asks you to evaluate a real service firm's costing approach, spot its weaknesses, and think about what a better system would look like. You should already be comfortable with the distinction between direct and indirect costs, the idea of a single plantwide overhead rate, and the basics of how firms assign costs to cost objects. If activity-based costing (ABC) is new to you, read those notes before tackling Part 2 of this series.
Purdy Call Centers Inc. (PCC) is a small outsourced call centre in rural Michigan that serves four clients with sophisticated tech-support needs. The firm uses a single plantwide overhead rate based on operator hours to assign all indirect costs to clients, which creates significant cost-distortion problems as clients consume different mixes of resources. This Part 1 covers PCC's business model, operations, staffing, and organisational structure; Parts 2 and 3 cover the cost system, financial data, and exam-style analysis.
PCC (Purdy Call Centers Inc.)
The outsourced call centre at the heart of this case, located near Bad Axe, Michigan. Founded in 1995 by Cal Purdy. In simple terms, PCC is a company that answers customer-support phone calls on behalf of other companies.
Outsourcing (call centre context)
The decision by a firm to hire an external specialist (like PCC) to handle its customer-support calls rather than running its own call centre. Think of it as paying someone else to do the work you could do in-house, because they can do it cheaper or better.
Economies of scale
The cost advantage that arises when a firm handles a large enough volume of calls to spread its fixed costs (equipment, software, building) across more units of work. In simple terms, the more calls PCC handles, the cheaper each individual call becomes.
Non-core competence
A business function that, while necessary, is not central to the firm's competitive strategy. A software company needs customer support, but its edge comes from writing code, not answering phones. So it outsources the support.
Response Resolution Team (RRT)
PCC's specialist team responsible for documenting solutions to new or complex problems. When operators encounter a problem that the computerised system cannot solve, the RRT writes the formal step-by-step resolution procedure. Think of it as PCC's internal knowledge-creation team.
FTE (Full-Time Equivalent)
A standard unit measuring one employee's full annual workload. PCC uses FTEs to budget operator time per client. If a client needs 55 FTE, that means 55 full-time operators' worth of hours for the year.
Operator
The front-line PCC employee who answers calls, logs problems, and guides callers through solutions using the computerised system. About 90% of PCC's operators are standard; the remaining 10% are supervisors.
Supervisor (PCC context)
A more experienced operator (roughly 10% of operator staff) who handles undocumented or complex problems that exceed the computer system's capability.
Event log / case number
The detailed record PCC's computer system keeps of every caller interaction. Each caller receives a case number at first contact, so any operator handling a subsequent call can read the full history without making the caller repeat themselves.
Down time (operator context)
Time an operator is on the clock but not answering calls. PCC targets roughly 10% of total available time as down time. Downtime is split 50-50 between the two clients each operator supports.
PCC was founded in 1995 by Cal Purdy in Bad Axe, Michigan (Huron County, the "Thumb" region).
Location chosen for low wages and high unemployment, similar to Gateway's rural strategy. The idea: achieve low operating costs without sacrificing service quality.
PCC's strategy is to provide superior call centre support to a limited number of clients (six or fewer).
Typical client: a small-to-medium firm selling a relatively sophisticated product (electronic equipment or software) that needs skilled phone support.
PCC only handles US and Canadian enquiries. No international support.
Economies of scale: Many firms lack the call volume to justify running their own centre. Outsourcing lets them share PCC's infrastructure.
Non-core competence: Senior management acknowledges support is important but does not consider it mission-critical. Better to let specialists handle it.
Higher service quality: A professional call centre can deliver a higher standard of support than most firms could achieve internally. This third motivation is less commonly recognised but matters.
When an operator answers a call, the entire interaction is recorded for quality assurance and training.
The operator logs detailed notes into PCC's computer system, including recommendations for resolving the caller's problem.
Each caller gets a case number at first contact. If they call back, any operator can pull up the full event log and continue without asking the caller to repeat their story.
The computer system does more than record notes. It provides step-by-step troubleshooting guidance to the operator, enabling relatively inexperienced staff to deliver effective support.
About 10% of operators serve as supervisors, handling problems that are undocumented or too complex for the computer system.
When an undocumented problem surfaces, it is flagged automatically, and the RRT is notified.
The RRT reviews the event log and writes a formal step-by-step procedure so any operator can resolve the same problem in future.
The RRT also works with clients to develop initial response protocols for each product and feeds back information about recurring problems, helping clients improve future products.
PCC prides itself on the speed and accuracy of this feedback loop.
In 2002, PCC had four active clients (see Exhibit 1): Carlin Software, Gunn Computers, Krag Wireless, and Mason Graphics. A fifth client, Smith Electronics, did not renew in 2001.
All clients sign long-term contracts, typically three years, reflecting the high initial investment in problem-resolution software and operator training.
Switching call centres is difficult and expensive for clients, so satisfied customers usually renew.
Each operator is trained to support two clients at a time. This cross-training policy gives PCC flexibility to handle demand peaks and cover for illness or leave.
Training is ongoing. Every new product or upgrade requires new software and operator retraining.
Training sequence: client engineers demonstrate the product to the RRT and select operators, they discuss likely problems, then operators practise on the resolution software.
Training consumes about 5% of an operator's time.
Client-specific training costs are tracked and directly charged to each client. Training staff salaries, however, are indirect costs.
The centre operates 8 am to 10 pm EST, six days a week (closed Sundays).
Operators regularly work overtime (roughly 10 hours per week on average), paid at 150% of normal pay.
Overtime lets PCC absorb workload surges (e.g. a client launching a new product) without hiring additional staff.
Overtime expenses are treated as indirect costs, not traced to specific clients.
PCC uses a functional structure with four departments reporting to the CEO (Cal Purdy):
Operations (Fred Thatcher): schedules operators, interfaces with training and RRT. Has two secretarial assistants.
Training (Cynthia Navarro): ensures operators are trained and up to date on client products. Has one assistant.
RRT (Jack Ryan): manages the Response Resolution Team. Has one secretarial assistant plus programmer staff.
Buildings and Grounds (Dick Morgan): facility management and support staff.
Mary Roby serves as both COO and CFO, reporting directly to Purdy. She has two accountants and one assistant.
Purdy has an executive assistant.
Department heads are responsible for hiring and evaluating their own staff.
PCC's model maps directly to the modern BPO (business process outsourcing) industry. Companies like Teleperformance, Concentrix, and TTEC provide the same outsourced call-centre services today, and the cost-allocation questions PCC faces (how to fairly price services to different clients consuming different resource mixes) are exactly the problems these firms wrestle with at scale.
The case also illustrates a classic make-or-buy decision. Smith Electronics chose to bring call-centre operations back in-house in 2001, which is the "make" side. The remaining clients stay with PCC because the "buy" economics work for them, at least at current prices.
Students often assume PCC is a manufacturing firm because the cost system uses terminology borrowed from manufacturing (overhead rates, direct labour). It is a service firm. There is no direct material cost at all.
Students sometimes think "operator training wages" and "operator wages" are both indirect costs. They are not. Both are direct costs traced to specific clients. Training wages (account 10500) are tracked by client and charged directly.
The 50-50 downtime split does not mean each operator spends equal time on both clients. It means idle time is allocated equally regardless of actual usage, which is a simplification that may distort client costs.
The RRT is not the same as the training department. The RRT creates problem-resolution content and feeds product-design insights back to clients. Training teaches operators how to use that content.
⚠️ Be prepared to identify which PCC costs are direct and which are indirect. The case deliberately blurs this by having the CFO treat nearly everything except operator wages and training wages as indirect.
⚠️ The case sets up a cost-system critique. You should be ready to explain why a single overhead rate based on operator hours is problematic when clients consume different overhead resources in different proportions.
⚠️ The loss of Smith Electronics in 2001 is a pivotal event. Expect questions about what happens to the overhead rate when volume drops (the "death spiral" of overhead allocation).
⚠️ The 50-50 downtime allocation is a testable detail. Know why it is a simplification and what distortion it could cause.
True or False: PCC has direct material costs in its cost system. (False. PCC is a service firm with no direct materials.)
True or False: Operator training wages are an indirect cost at PCC. (False. Client-specific training wages are tracked and directly charged to each client.)
Fill in the blank: PCC trains each operator to support ____ clients at a time. (Two.)
True or False: The RRT reports to the Training Department. (False. The RRT is a separate department headed by Jack Ryan.)
Fill in the blank: Overtime at PCC is paid at ____% of normal pay. (150%.)
Q: What three motivations does the case identify for why firms outsource their call-centre operations to PCC?
A: Economies of scale (sharing fixed costs across higher call volumes), non-core competence (call-centre operations are not the client's primary business focus), and the ability to achieve a higher level of service through a professional provider.
Q: Describe the role of the Response Resolution Team (RRT) and explain why it is important to PCC's business model.
A: The RRT documents solutions to new or complex problems by writing formal step-by-step procedures. It also develops initial response protocols with clients and provides feedback on recurring problems so clients can improve future products. The RRT is central to PCC's value proposition because it creates the knowledge base that allows relatively unskilled operators to provide effective support.
Q: Why does PCC train each operator to support two clients rather than specialising in one?
A: Cross-training provides staffing flexibility. It helps PCC handle demand peaks that vary by client and provides backup coverage when operators are ill or on leave. It also supports the small-client-base strategy by ensuring capacity is not wasted if one client's call volume drops temporarily.
Q: Explain why the loss of Smith Electronics in 2001 was particularly damaging to PCC, beyond the immediate revenue loss.
A: PCC operates in a thin market where new-client acquisition is rare and switching costs are high. After losing Smith Electronics, PCC spent six months searching for a replacement client and, two years later, still had not found one. The firm had to lay off operators, and the fixed overhead that had been spread across five clients now had to be absorbed by only four, raising the per-client cost and squeezing margins.
Q: Identify two PCC cost items that are direct costs and two that are indirect costs.
A: Direct costs: operator wages for answering calls (account 10000) and operator training wages (account 10500), both traced to specific clients. Indirect costs: operator overtime (account 20100) and support staff wages (account 21000), both allocated to clients via the overhead rate.
This case connects directly to activity-based costing (ABC), which Part 2 will explore. PCC's single overhead rate is the classic setup for demonstrating why ABC produces more accurate client costs when resource consumption patterns differ across cost objects.
The loss of Smith Electronics and the resulting overhead pressure connects to the concept of the death spiral (or downward demand spiral) in cost allocation: losing volume raises the per-unit overhead rate, which raises prices, which risks losing more clients.
The make-or-buy analysis also links to relevant cost analysis and strategic cost management: when should a firm outsource, and what costs are relevant to that decision?
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