Last Updated 28 Jan 2021

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 2,000. 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 . 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.

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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. 5 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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