The Classic Pen CompanyA Case Analysis

Presentation Submitted By

DEBENDRA KUMAR NAYAK:-87CHANDRASHEKHAR:- 71

SAURAV JHA-86ARCHANA:-

PURBASHA:-

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

“Tough Global Competition” –

“Can the products be priced better?”

ISSUE 3 – Product Mix

Process for Red and Purple pens require more resources (set-up time etc.) cfgfhhjhbjkCV

ISSUE 4 – Internal Processes

A lot of time spent on scheduling and purchasing activities

Blue Black Red Purple TotalDM 25,000 20,000 4,680 550 50,230DL 10,000 8,000 1,800 200 20,000OV 30,000 24,000 5,400 600 60,000Total Cost 65,000 52,000 11,880 1,350 130,230

Sales 75,000 60,000 13,950 1,650 150,600

Profit 10,000 8,000 2,070 300 20,370

Profit Marging 13% 13% 15% 18% 14%

Conventional Cost Sheet

Cost Allocation: Under ABC

Total Activity Rate

Handle Production Runs 50% 14,000 80% 8,000 22,000 150 146.7Set up Time 40% 11,200 11,200 526 21.29Parts Administration 10% 2,800 20% 2,000 4,800 4 1200Machine Support 100% 14000 14,000 10000 1.4

Total 28,000 10,000 14000 52,000

Indirect labour Computer Exp. Machine Exp

Blue Black Red Purple Total50,000 40,000 9,000 1,000 100,000

DM 25,000 20,000 4,680 550 50,230DL 10,000 8,000 1,800 200 20,00040% Fringe Benefits 4,000 3,200 720 80 8,000OverheadsMachine Support 7,000 5,600 1,260 140 14,000Prod Run Exp. 7,333 7,333 5,573 1,760 22,000Set up Exp. 4,259 1,065 4,855 1,022 11,200Admin Exp 1,200 1,200 1,200 1,200 4,800TotalOverheads 19,792 15,198 12,888 4,122 52,000

Total Cost 58,792 46,398 20,088 4,952 130,230CPU 1.18 1.16 2.23 4.95Sales 75,000 60,000 13,950 1,650 150,600

1.50 1.50 1.55 1.65Profit 16,208 13,602 -6,138 -3,302 20,370Profit/unit 0.32 0.34 -0.68 -3.30Profit Margin 22% 23% -44% -200% 14%

ABC Cost Sheet

Blue50%

Black40%

Red9%

Purple1%

Overhead Breakup - Traditional Costing

Overhead Breakup - Activity Based Costing

Red23%

Black31%

Blue39%

Purple7%

OVERHEADS COMPARISION

Return on Sales BLUE BLACK RED PURPLE TOTAL

(ABC) 21.6% 22.7% -44.0% -200.1% 13.5% (Traditional) 13.3% 13.3% 14.8% 18.2% 13.5%

Traditional vs. ABC

ObservationsTo produce the new products the company

has added large quantity of overheads: Computer systems and support expenses

So the overheads to the new products are high under ABC. Which, is the correct reflection of the cost determination