CLASSIC PEN CO. ABSORPTION COSTING METHOD Harvard Case Solution & Analysis

CLASSIC PEN CO. ABSORPTION COSTING METHOD Case Study Solution

ACTIVITY BASED COSTING METHOD
BLUE BLACKREDPURPLETOTAL
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.......

 

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.

Other Similar Case Solutions like

CLASSIC PEN CO. ABSORPTION COSTING METHOD

Share This