Classic Pen Case

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Classic Pen Activity-Based Costing Analysis Executive Summary

By using the volume based costing system, Classic Pen appears to be profitable and making a good return on sales of blue, black, red, and purple pens. The percentage of return on sales of all four colors of pens seems to be no less than 17%. Once the traditional income statement is analyzed, the indirect costs are lumped together in the general cost pool titled “overhead”; these costs should be broken down into specific cost pools. See below. Indirect Labor & Benefits $15,016 $11,551 $2,310

Cost Pools Breakdown Scheduling & Production Set Up Record Keeping Machine Cost

Computer Systems $8,052 $2,141

Machinery

Maint.

Energy

$7,396
Blue 29,298 5,451 7,116 2,318 16,839 7,866 68,888 1.34 Black 21,318 4,217 5,505 1,686 12,253 4,683 49,662 1.33

$4,437
Red 5,040 4,217 5,505 406 7,056 1,377 23,601 2.62

$2,218
Purple 468 1,131 1,477 41 655 125 3,897 4.33

Totals $15,016 $19,603 $4,451 $14,051

Costs Materials Scheduling & Production Set Up Record Keeping Direct Labor Machine Cost Total Cost Total Cost Per Unit

With this information, a new Income statement can be generated for the Classic Pen Company, this once clearly shows the return on sales for all color pens sold is no longer 17% The blue and black pens sold have a return of 22% and 23% respectively, while the newly introduced colors of red and purple have a negative return of -48% and -133% respectively. ABC Income Statement Black Red $64,328 $15,930 21,318 5,040 12,253 7,056 4,217 5,505 1,686 4,683 $14,666 23% 4,217 5,505 406 1,377 -$7,671 -48%

Sales Material costs Direct labor Overhead Costs Scheduling & Production Set Up Record Keeping Machine Cost Total operating income Return on sales

Blue $88,408 29,298 16,839 5,451 7,116 2,318 7,866 $19,520 22%

Purple $1,674 468 655 1,131 1,477 41 125 -$2,223 -133%

Total $170,340 $56,124 $36,803 $15,016 $19,603 $4,451 $14,051 $24,292 14%

Based on the ABC system it...
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