CLASSIC PEN CO. ABSORPTION COSTING METHOD Case Study Solution
| ACTIVITY BASED COSTING METHOD | ||||||
| BLUE | BLACK | RED | PURPLE | TOTAL | ||
| Production/Sales Volume | 50,000 | 40,000 | 9,000 | 1,000 | 100,000 | |
| Sales Price | 1.50 | 1.50 | 1.55 | 1.65 | ||
| SALES REVENUE | 75,000 | 60,000 | 13,950 | 1,650 | 150,600 | |
| Direct Material | 25,000 | 20,000 | 4,680 | 550 | 50,230 | |
| Direct Labor | 10,000 | 8,000 | 1,800 | 200 | 20,000 | |
| Indirect Labor | 6,875 | 4,594 | 6,501 | 2,030 | 20,000 | |
| Fringe Benefits | 6,750 | 5,038 | 3,320 | 892 | 16,000 | |
| Computer systems | 3,167 | 3,167 | 2,527 | 1,140 | 10,000 | |
| Machinery | 4,000 | 3,200 | 720 | 80 | 8,000 | |
| Maintenance | 2,000 | 1,600 | 360 | 40 | 4,000 | |
| Energy | 1,000 | 800 | 180 | 20 | 2,000 | |
| TOTAL COSTS | 58,792 | 46,398 | 20,088 | 4,952 | 130,230 | |
| PROFIT / (LOSS) | 16,208 | 13,602 | (6,138) | (3,302) | 20,370 | |
According to the Activity based Costing method, two entire color classes show a negative profit of $ 6,138 for RED COLOR and $ 3,302 for the PURPLE COLOR.
This is directly against the organization’s strategic perspective which was trying to incorporate more new colors in their production cycle.
Further, if we separately take the profit making colors, then the BLUE COLOR PENS is providing a return of 21.6% and the BLACK PEN is providing a return of 22.67%; providing that the expected margins by the organization of 20% is being achieved. The new production colors of RED and PURPLE are the loss makers which is reducing the overall profitability of the organization.
Recommendations
The main recommendations for the CLASSIC PEN COMPANY, is to immediately stop producing the RED and the PURPLE COLOR PENS as this is making losses for the organization.
The organization should utilize all its machine capacity of producing 100,000 units for the BLUE and the BLACK pens only, as this will increase their profits more.
New colors introduction, for which the organization was considering was a plan with very high variable over heads which needs to be sought out using the activity based costing method before acceptance.......
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