This document analyzes cost allocation and profitability for different colored pens produced by Classic Pen. It includes an ABC analysis showing scheduling, setup, and record keeping costs vary significantly by pen color. The red and purple pens have negative returns on sales. Recommendations include increasing production runs to lower unit costs and discontinuing unprofitable pen colors.
3. Cost Pools
Exp Category Expense Cost Pool % Amount
Indirect labor &
$28,876 Scheduling & Production 52% $15,016
Fringe benefits
Set up 40% 11,551
Record Keeping 8% 2,310
Computer systems 10,193 Scheduling & Production 79% 8,052
Record Keeping 21% 2,141
Machinery 7,396 Machine Cost 100% 7,396
Maintenance 4,437 Machine Cost 100% 4,437
Energy 2,218 Machine Cost 100% 2,218
Total $53,120
3
4. Cost Pools
Cost Pools Expense Cost Driver Occurrences Expense Per
Scheduling & Number of
$23,068 146 $158.00
Production Production Runs
Number of Set
Set-Up 11,551 593 $19.47
up Hours
Number of
Record Keeping 4,451 146 $30.48
Production Runs
Number of
Machine Cost 14,051 10,100 $1.39
Machine Hours
$53,120
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5. Allocation
Blue Pen
Units Produced 51,400
Activity
Rate Activity Total Unit
Sales $88,408 $1.72
Material Costs $29,298 $0.57
Direct Labor & Fringe Benefits $16,839 $0.33
Scheduling & Production Costs $158.00 53 $8,374 $0.16
Set-Up Costs $19.47 244 $4,748 $0.09
Record Keeping Costs $30.48 53 $1,616 $0.03
Machine Costs $1.39 5,654 $7,866 $0.15
Total Cost $68,740 $1.34
Operating Income $19,668 $0.38
Return on Sales 22.2%
6. ABC by Pen
Blue Pen Black Pen Red Pen Purple Pen Total
Units Produced 51,400 37,400 9,000 900 98,700
Total Unit Total Unit Total Unit Total Unit Total
Sales $88,408 $1.72 $64,328 $1.72 $15,930 $1.77 $1,674 $1.86 $170,340
Material Costs $29,298 $0.57 $21,318 $0.57 $5,040 $0.56 $468 $0.52 $56,124
Direct Labor & Fringe Benefits $16,839 $0.33 $12,252 $0.33 $2,948 $0.33 $295 $0.33 $32,334
Scheduling & Production Costs $8,374 $0.16 $6,478 $0.17 $6,478 $0.72 $1,738 $1.93 $23,068
Set-Up Costs $4,748 $0.09 $878 $0.02 $5,110 $0.57 $814 $0.90 $11,551
Record Keeping Costs $1,616 $0.03 $1,250 $0.03 $1,250 $0.14 $335 $0.37 $4,451
Machine Costs $7,866 $0.15 $4,683 $0.13 $1,377 $0.15 $125 $0.14 $14,051
Total Cost $68,740 $1.34 $46,859 $1.25 $22,204 $2.47 $3,775 $4.19 $141,578
Operating Income $19,668 $0.38 $17,469 $0.47 ($6,274) ($0.70) ($2,101) ($2.33) $28,762
Return on Sales 22.2% 27.2% (39.4%) (125.5%)
7. Income Statement
Traditional Income Statement
Blue Black Red Purple Total
Sales $88,408 $64,328 $15,930 $1,674 $170,340
Material costs 29,298 21,318 5,040 468 56,124
Direct labor 12,028 8,752 2,106 211 23,096
Overhead @ 270% 32,475 23,629 5,686 569 62,359
Total operating income $14,608 $10,629 $3,098 $427 $28,762
Return on sales 17% 17% 19% 25% 17%
8. Income Statement
Traditional Income Statement
Blue Black Red Purple Total
Sales $88,408 $64,328 $15,930 $1,674 $170,340
Material costs 29,298 21,318 5,040 468 56,124
Direct labor 12,028 8,752 2,106 211 23,096
Overhead @ 270% 32,475 23,629 5,686 569 62,359
Total operating income $14,608 $10,629 $3,098 $427 $28,762
Return on sales 17% 17% 19% 25% 17%
ABC Income Statement
Blue Black Red Purple Total
Sales $88,408 $64,328 $15,930 $1,674 $170,340
Material costs 29,298 21,318 5,040 468 56,124
Direct labor 16,839 12,252 2,948 295 32,334
Overhead @ 270% 22,603 13,289 14,215 3,013 53,120
Total operating income $19,668 $17,469 ($6,274) ($2,101) $28,762
Return on sales 22% 27% (39%) (126%) 17%
11. Traditional Unit Cost
$2.00
$2.00
$1.60
$1.60
Per Unit Cost
$1.20
$1.20
U
o
n
P
C
e
s
r
t
i
$0.80
$0.80
$0.40
$0.40
$0.00
$0.00
Material Direct Labor Scheduling & Production
Scheduling & Set-up Record Keeping Machine
Material Direct Labor Setup Record Keeping Machine
Production Cost Pool
Cost Pool
12. Unit Cost Comparison
$2.00
$2.00
$1.60
$1.60
Per Unit Cost
$1.20
$1.20
U
o
n
P
C
e
s
r
t
i
$0.80
$0.80
$0.40
$0.40
$0.00
$0.00
Material
Material Direct Labor
Direct Labor Scheduling &
Scheduling & Production Set-up
Setup Record Keeping
Record
Keeping Machine
Machine
Production Cost Pool
Cost Pool
13. ABC Unit Cost
Blue Pen Black Pen Red Pen Purple Pen
Units Produced 51,400 37,400 9,000 900
Unit Unit Unit Unit
Sales $1.72 $1.72 $1.77 $1.86
Material Costs $0.57 $0.57 $0.56 $0.52
Direct Labor & Fringe Benefits $0.33 $0.33 $0.33 $0.33
Scheduling & Production Costs $0.16 $0.17 $0.72 $1.93
Set-Up Costs $0.09 $0.02 $0.57 $0.90
Record Keeping Costs $0.03 $0.03 $0.14 $0.37
Machine Costs $0.15 $0.13 $0.15 $0.14
Total Cost $1.34 $1.25 $2.47 $4.19
Operating Income $0.38 $0.47 ($0.70) ($2.33)
Return on Sales
14. ABC Unit Cost
Blue Pen Black Pen Red Pen Purple Pen
Units Produced 51,400 37,400 9,000 900
Unit Unit Unit Unit
Sales $1.72 $1.72 $1.77 $1.86
Material Costs $0.57 $0.57 $0.56 $0.52
Direct Labor & Fringe Benefits $0.33 $0.33 $0.33 $0.33
Scheduling & Production Costs $0.16 $0.17 $0.72 $1.93
Set-Up Costs $0.09 $0.02 $0.57 $0.90
Record Keeping Costs $0.03 $0.03 $0.14 $0.37
Machine Costs $0.15 $0.13 $0.15 $0.14
Total Cost $1.34 $1.25 $2.47 $4.19
Operating Income $0.38 $0.47 ($0.70) ($2.33)
Return on Sales
15. Alternatives
• Outsource specialty color pens
• Create complimentary colored pens
• Add another production line within the building
• Increase the unit price of each pen
• Removable vat liners
16. Alternatives
• Make purple pen a seasonal item
• Update physical pen design
• Reducing production for red and/or purple
• Discontinuing production for red and/or purple
17. Recommendation
• Increase production runs to 900+ units
• This will reduce costs in three of the four cost pools:
2. Scheduling
3. Setups
4. Record keeping
• This will yield returns on sales of 20%+
for all current products
• Additional future products should also
see similar results
Outsource specialty color pens Create complimentary colored pens Add another production line within the building Increase the unit price of each pen – in packaging, sell 10 rather then 12. - update packaging to specific to each color line Removable vat liners
Make purple pen a seasonal item, back to school Reducing production for red and purple, loose less money Discontinuing red or purple pen production
