Classic Pen Company had been the low-cost producer of traditional BLUE pens and BLACK pens. They had been thinking to extend their product line into new products that offer premium selling price. Consequently, five years earlier they introduced RED pens, which were sold at 3% premium price. A year back they introduced PURPLE pens, which sold at 10% premium price. Though the new products seem profitable, there has been a dip in the overall profitability and the new products are not even earning the margins as their traditional products.
The company faces a variety of problems which are summarized below: * Red and Purple Pens are not earning expected profit margins and also the overall profitability has declined * Some of the operational problems have aroused due to introduction of Red coloured pens which required more changeovers from the existing process * All plants indirect expenses were aggregated at the plant level and allocated to products based on their direct labour content. The above mentioned problems are important especially because company wants to introduce some new range of products so without knowing the causes of current problems it would not be healthy to go ahead with new introductions. Also they need to know why the new products are giving fewer profit margins than the old products. Besides the competition has also intensified and companies are increasingly producing greater variety of products and services.
Activity Based Costing
They are currently 6 categories of support expenses that are being allocated to pen production Expense Category| Expense|
Indirect Labor| 20000|
Fringe Benefits| 16000|
Computer Systems| 10000|
The table below shows the various activities and their allocation to the pen production: Activities (in $)| | | | | | |
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| | Handling...