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Case Summary

Classic pen is a producer of BLACK and BLUE ink pen


Previously, profit margin were over 20% of sales
Five year earlier, Classic pen introduced the Red ink pen
at 3% premium
Last year, PURPLE pen had been introduced at 10%
premium

Issue faced by company


management
Profitability
Even though company introduced the new product with high return, the
overall profit still falling

Processing time
a lot of time to be used in scheduling and purchasing activities
The production of new products need longer time to produce and process

Product mix
Required more resources for process the new product

Operation
The overhead rate increased from 200% to 300 % after the new product
launched

Cost Structure
Expenses

Indirect labor, fringe benefits, computer system, machinery,


maintenance and energy

Cost Pool

Indirect labor, fringe benefits for direct labor, computer system


expenses, and machinery expenses

Activities

Machines Setting, handling production activities, Part


Administrative, machine support, sales order handling, key
account management

Product

Black, Blue, Red, and Purple

Analysis Cost Pool Structure


Direct labor
Fringe Benefits were 50% of labor expenses

Indirect Labor
50% of indirect labor involved in scheduling and handling production
40% of indirect labor were due to the physical changeover from one color to
another
10% of indirect labor was used to maintaining records activities

Computer expenses
80% was involved in the production run activity
20% was used to keep record on the four products

Machinery expenses
Machinery, maintenance, energy used to support the daily activity

Indirect labor
$ 20000

Expens
es

Cost
Pool

Indirect labor
+fringe benefit
(IDL)
$28000
10%
40%
50%

Production run

Activity setup

Computer
system
expenses
$ 10000
Computer
System
Expenses
$10000
80%

Machinery
$14000

Fringe Benefit
$16000

Machinery
$14000

Fringe Benefit
(DL)
$8000

20%

Part
administrative

Machine
Support

DL (Fringe
Benefit)

Indirect labor
=$14000 Indirect labor = $11200
Indirect labor
= Machinery = $14000 Fringe Benefit = $8000
Computer expenses=$8000
$2800
= $ 22000
Computer Expenses=
$2000
= $ 4800

Calculation for cost per unit (ABC


model)

Calculation for cost per unit (ABC


model)

Calculation for cost per unit (ABC


model) cont.

Compare Traditional VS ABC model

Compare Traditional VS ABC model


cont.

Compare Traditional VS ABC model


cont.

Compare Traditional VS ABC model


cont.

ABC Model per unit VS Traditional Cost


per unit

Recommendation based on ABC


model
Increase the sale price of RED and PURPLE pens
Reduced Overhead cost
Outsource the RED and PURPLE pen production to other
company
Company should add a new production line for these
two product to reduce physical changeover of color in
the machinery

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