CLASSIC PEN COMPANY

PRESENTED BY:ONLY MUKESH

About the companyClassic Pen company had been a low-cost

producer of pens for several years.It manufactured BLUE and BLACK colored

pensAs part of product diversification they

introduced RED and PURPLE colored pens.BLUE and BLACK pens gave 20% profit on

salesRED pen & PURPLE pen were expected to

give 3% premium & 10% premium respectively.

Company’s area of concern

Overall profitability was decreasingAll the 4 products failed to generate expected

return.

Causes of concernFaulty overhead absorption system.They treated overhead as a burden.Same overhead absorption rate for all 4 type

of pens i.e. 300% of Direct Labor.

Abc analysisIdentification of various support cost heads.

Indirect Labor – $ 20,000 Fringe Benefits - $ 16,000 Computer System - $ 10,000 Machinery - $ 8,000 Maintenance - $ 4,000 Energy - $ 2,000

Abc analysis (contd…)

Identification of activities on which costs of various support cost heads were incurred:Indirect Labor - $ 20,000

Scheduling & Production handling, etc. – 50% Physical Changeover - 40% Records Maintenance - 10%

Fringe Benefits - $ 16,000 (40% 0f Direct Labor + Indirect Labor)

Abc analysis (contd…)

Computer Expenses - $ 10,000Production Run Scheduling - 80%Record – Keeping - 20%

Machinery + Maintenance + Energy - $14,000Incurred to supply machine capacityTotal Machine Hours – 10,000 hrs.

Fixation of prices as per abc analysis

THANK YOU