Solution for Classic Pen

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Case Study: Classic Pen Company

1- Cost of production of the pens according to ABC method:
INDIRECT FINGE BENEFICT
INDIRECT LABOR
TOTAL indirect Labor

Indirect Labor
Computer System
Other Overhead
Total overhead
Quantity
Overhear Rate

8,000
20,000
28,000
Production Runs
Setup Time Administration Run Machines
14,000
11,200
2,800
8,000
2,000
14,000
22,000
11,200
4,800
14,000
150
526
4
10,000
146.67
21.29
1,200.00
1.40

Total
28,000
10,000
14,000
52,000

Overhead distribution among the cost Pool
Amount of overhead
22,000.00
11,200.00
4,800.00
14,000.00
52,000.00
100,000

Quantity
150
526
4
10,000

Rate
Amount of overhead
8,000
100,000

0.08
Quantity
100,000

Blue

Production Runs
Setup Time
Administration
Run Machines
Total Overhead by pen
Quantity of pen
Overhead by unit of pen

Black
0.50
0.20
0.08
0.38
1.16

Blue
7,333.33
4,258.56
1,200.00
7,000.00
19,791.89
50,000
0.40

Black
7,333.33
1,064.64
1,200.00
5,600.00
15,197.97
40,000
0.38

Red
5,573.33
4,854.75
1,200.00
1,260.00
12,888.09
9,000
1.43

Purple
1,760.00
1,022.05
1,200.00
140.00
4,122.05
1,000
4.12

Blue
4,000.00
50,000
0.08

Black
3,200.00
40,000
0.08

Red
720.00
9,000
0.08

Purple
80.00
1,000
0.08

Direct Fringe Benefit distribution among pen

Direct Fringe Benefit
Quantity of pen
Direct Fringe Benefit by pen

Cost of Production
Material Cost
Direct Labor
Direct Fringe Benefit
Overhead Cost
Cost of Production

0.50
0.20
0.08
0.40
1.18

Red
0.52
0.20
0.08
1.43
2.23

Purple
0.55
0.20
0.08
4.12
4.95

2- Actions that will be taken by Classic Pen Company
As shown by the table below, the traditional cost shows the company is realizing benefit for all its pens.

Blue
Material Cost
Direct Labor
Overhead Cost
Cost of Production
Quantity of pen
Cost of Production according to the Traditionnal
Actual Unit Selling Price
Profit/Loss
$

Black
25,000
20,000
10,000
8,000
30,000
24,000
65,000.00 52,000.00
50,000
40,000
1.30
1.30
1.50
1.50
0.20 $
0.20 $

Red
Purple
4,680
550
1,800
200
5,400
600
11,880.00
1,350.00
9,000
1,000
1.32
1.35
1.55
1.65
0.23 $
0.30

But with ABC Method we have realized that the unit selling price of the Red pen and Purple pen respectively $1.55 and $1.65 are less than the cost of production, therefore we expect that the Classic Pen Company will increase the unit selling price of these two pens. Blue

Material Cost
Direct Labor
Direct Fringe Benefit
Overhead Cost
Cost of Production according to ABC
Actual Unit Selling Price
Profit/Loss

$

0.50
0.20
0.08
0.40
1.18
1.50
0.32 $

Black
0.50
0.20
0.08
0.38
1.16
1.50
0.34 $

Red
0.52
0.20
0.08
1.43
2.23
1.55
(0.68) $

Purple
0.55
0.20
0.08
4.12
4.95
1.65
(3.30)

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