Classic Pen Case Assignment
You should hand in one page of analysis and two sets of supporting calculation.
The first supporting calculation is an ABC system for Classic Pen, constructed by filling in the blanks in the following table. First allocate the total expenses in each row to the various activities, based on information in the case. Then choose a cost driver and calculate the rate per unit of the cost driver.
Handle Production RunsSet up
Indirect labor & related fringes14,00011,2002,800$28,000* Computer systems$8,000$2,000$10,000
Total activity costs22,00011,2004,80014,000 52,000
Cost driver# of runsSetup timeDL HoursMachine Hours
Total quantity of cost driver150 runs
(Exhibit 2)526 hours200010,000
Allocation rate per unit of cost driver146.6721.292.401.40
*This includes half of the $16,000 fringe benefits. The other half is associated with direct labor – don’t forget to include it in your ABC income statement!
The second supporting calculation is an ABC income statement showing sales revenue minus each type of direct and indirect cost assigned to the four pen types. Add two lines at the bottom of the income statement: one line shows the operating profit per unit for each type of pen based on your ABC calculations, and the other line shows the operating profit per unit based on the traditional-income calculations in Exhibit 1 of the case.
The analysis consists of answers to the following questions (about one-half page each).
(a)Your ABC analysis should show that purple pens are very unprofitable, while blue pens earn most of the factory’s profits. One of the managers at Classic Pen questions your analysis, saying, “I can’t believe there’s that much difference in profit per unit between the blue and purple pens....