The Classic Pen Company
The Classic Pen Company A Case Analysis
The Classic Pen Company – A Case for Activity Based Costing
Introduction: • Low-cost producer of traditional Blue and Black ink pens • Profit margins of over 20% of sales • 5 years earlier- introduced Red Pens using same technology at 3% premium • Recently, introduced Purple Pens using same technology at 10% premium.
Classic Pen Company – Issues facing the Management
ISSUE 1 - Profitability
While Red & Purple pens seem to be more profitable, overall profitability of the company is falling ISSUE 2 - Pricing
ISSUE 3 – Product Mix
Process for Red and Purple pens require more resources (set-up time etc.) cfgfhhjhbjkCV ISSUE 4 – Internal Processes
“Tough Global Competition” –
“Can the products be priced better?”
A lot of time spent on scheduling and purchasing activities
Conventional Cost Sheet Blue Black Red Purple Total DM 25,000 20,000 4,680 550 50,230 DL 10,000 8,000 1,800 200 20,000 OV 30,000 24,000 5,400 600 60,000 Total Cost 65,000 52,000 11,880 1,350 130,230 Sales Profit 75,000 60,000 13,950 10,000 8,000 13% 2,070 15% 1,650 300 18% 150,600 20,370 14%
Profit Marging 13%
Cost Allocation: Under ABC
Indirect labour Computer Exp. Machine Exp Total Activity Rate Handle Production Runs 50% 14,000 80% 8,000 22,000 150 146.7 Set up Time 40% 11,200 11,200 526 21.29 Parts Administration 10% 2,800 20% 2,000 4,800 4 1200 Machine Support 100% 14000 14,000 10000 1.4 Total 28,000 10,000 14000 52,000
ABC Cost Sheet Blue Black Red Purple Total 50,000 40,000 9,000 1,000 100,000 DM 25,000 20,000 4,680 550 50,230 DL 10,000 8,000 1,800 200 20,000 40% Fringe Benefits 4,000 3,200 720 80 8,000 Overheads Machine Support 7,000 5,600 1,260 140 14,000 Prod Run Exp. 7,333 7,333 5,573 1,760 22,000 Set up Exp. 4,259 1,065 4,855 1,022 11,200 Admin Exp 1,200 1,200 1,200 1,200 4,800 TotalOverheads 19,792 15,198 12,888 4,122 52,000 Total Cost CPU Sales Profit Profit/unit Profit Margin 58,792 1.18 75,000 1.50 16,208
The Classic Pen Company – A Case for Activity Based Costing
Introduction: • Low-cost producer of traditional Blue and Black ink pens • Profit margins of over 20% of sales • 5 years earlier- introduced Red Pens using same technology at 3% premium • Recently, introduced Purple Pens using same technology at 10% premium.
Classic Pen Company – Issues facing the Management
ISSUE 1 - Profitability
While Red & Purple pens seem to be more profitable, overall profitability of the company is falling ISSUE 2 - Pricing
ISSUE 3 – Product Mix
Process for Red and Purple pens require more resources (set-up time etc.) cfgfhhjhbjkCV ISSUE 4 – Internal Processes
“Tough Global Competition” –
“Can the products be priced better?”
A lot of time spent on scheduling and purchasing activities
Conventional Cost Sheet Blue Black Red Purple Total DM 25,000 20,000 4,680 550 50,230 DL 10,000 8,000 1,800 200 20,000 OV 30,000 24,000 5,400 600 60,000 Total Cost 65,000 52,000 11,880 1,350 130,230 Sales Profit 75,000 60,000 13,950 10,000 8,000 13% 2,070 15% 1,650 300 18% 150,600 20,370 14%
Profit Marging 13%
Cost Allocation: Under ABC
Indirect labour Computer Exp. Machine Exp Total Activity Rate Handle Production Runs 50% 14,000 80% 8,000 22,000 150 146.7 Set up Time 40% 11,200 11,200 526 21.29 Parts Administration 10% 2,800 20% 2,000 4,800 4 1200 Machine Support 100% 14000 14,000 10000 1.4 Total 28,000 10,000 14000 52,000
ABC Cost Sheet Blue Black Red Purple Total 50,000 40,000 9,000 1,000 100,000 DM 25,000 20,000 4,680 550 50,230 DL 10,000 8,000 1,800 200 20,000 40% Fringe Benefits 4,000 3,200 720 80 8,000 Overheads Machine Support 7,000 5,600 1,260 140 14,000 Prod Run Exp. 7,333 7,333 5,573 1,760 22,000 Set up Exp. 4,259 1,065 4,855 1,022 11,200 Admin Exp 1,200 1,200 1,200 1,200 4,800 TotalOverheads 19,792 15,198 12,888 4,122 52,000 Total Cost CPU Sales Profit Profit/unit Profit Margin 58,792 1.18 75,000 1.50 16,208