Essay on Classic Pen Co. Case

654 Words3 Pages
Classic Pen Co. Case

In the past Classic Pen Company had been the low-cost producer of black and blue pens and had profit margins over 20% of sales. Over the last five years Pen Co. decided to start producing red and purple pens. They require the same basic production technology but can be sold at 3% and 10% premium selling prices. Sales Manager Dennis Selmor is just seeing the financial results and is not happy with the numbers.

The first issue that Pen Co. is facing is their decline in profitability. Even though the numbers show the red and purple pens are more profitable individually (red 14.8%, purple 18.2%), the overall return on sales is declining (13.5%). A second issue that Pen Co. has is the issue of addition of
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Finally the remaining indirect costs are the machinery ($8,000), maintenance ($4,000), and energy ($2,000). These are all used to supply the machine with the capacity to produce the pens with a total of $14,000.

Overall Classic Pen Co. must improve upon several areas of demand in order to increase its profitability similar to what it had been in the past. They need to increase their planning and try to adjust their current planning system and organizing. They could invest in more computers to increase the amount of scheduling being done by computers and as a result lower their indirect labour costs. Finally I recommend they should invest in some more machines to produce the different colour pens in. This would have a high cost of capital but would eventually save the company money in the labour cost and time required for the physical changeover between colours
Calculation Page

Indirect Labour Machine Support
Handling Production Runs = 10,000 Machinery = 8,000
Set Up = 8,000 Maintenance = 4,000
Parts Administration = 2,000 Energy = 2,000
Fringe Indirect Labour = 8,000 Total = 14,000

Computer Support Fringe for Direct Labour
Handling Production Runs = 8,000 Fringe = 8,000
Parts Administration = 2,000

Total Overhead = 60,000

Calculating Activity Rate Activities | Activity Cost | Cost Driver # | Calculation | Activity Rate | 1) Handling PR | 22,000 | 150 | 22,000/150 | 146.67 / Run | 2) Set Up | 12,000 |

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