Classic Pen Co. Case

Classic write Co. slip In the past Classic Pen confederacy had been the low-cost manufacturer of black and blue pens and had profit margins over 20% of sales. Over the become five years Pen Co. decided to start producing red and over-embellished pens. They require the same basic production technology but flock be sold at 3% and 10% premium change prices. Sales Manager Dennis Selmor is just seeing the financial results and is not halcyon with the numbers. The first guinea pig that Pen Co. is facing is their decline in profitability. raze though the numbers show the red and purple pens ar much than profitable individually (red 14. %, purple 18. 2%), the overall return on sales is declining (13. 5%). A second issue that Pen Co. has is the issue of addition of resource be. It requires a substantial amount of cartridge clip for personal changeover of production from one colourize pen to another. Particularly changing from another colour to red. The final issue Pen Co. f aces is the cast up of be related to scheduling and purchasing activities. Most of the in govern labour costs and computer system costs are related to scheduling and purchasing.Pen Companys declining profitability could be based on the amount of the orders overhead. They have determined overhead to be 300% of direct labour costs, when previously the overhead cost was only 200%. The composing of this overhead is corroboratory labour, fringe benefits, computer systems, elevator carry, maintenance, and energy. The reason for such a large increase in overhead is because of the higher demand for indirect costs due to the addition of more complex and specialized products. opus the cost for direct labour per one unit is the same for individually colour of pen produced.The cost for indirect labour is made up of three different activities 50% for handling production runs ($10,000), 40% for carnal changeover or set up costs ($8,000), and 10% for maintaining records or parts administr ation ($2,000). The cost for computer systems is made up of cardinal activities 80% for production run activities ($8,000), and 20% for record keeping or parts administration ($2,000). Finally the remaining indirect costs are the machinery ($8,000), maintenance ($4,000), and energy ($2,000).These are all used to supply the machine with the capacity to produce the pens with a total of $14,000. Overall Classic Pen Co. must improve upon several areas of demand in order to increase its profitability similar to what it had been in the past. They need to increase their planning and experiment to adjust their current planning system and organizing. They could invest in more computers to increase the amount of scheduling being done by computers and as a result lower their indirect labour costs.Finally I propose they should invest in some more machines to produce the different colour pens in. This would have a high cost of capital but would last save the company money in the labour cost and time required for the physical changeover between colours Calculation knave Indirect LabourMachine Support Handling mathematical product Runs = 10,000Machinery = 8,000 rophy Up = 8,000Maintenance = 4,000 part Administration = 2,000Energy = 2,000 Fringe Indirect Labour = 8,000Total = 14,000 Computer SupportFringe for Direct LabourHandling Production Runs = 8,000Fringe = 8,000 Parts Administration = 2,000 Total Overhead = 60,000 Calculating Activity pace Activities Activity Cost Cost Driver Calculation Activity tempo 1) Handling PR 22,000 150 22,000/150 146. 67 / Run 2) Set Up 12,000 526 12,000/526 22. 81 / Hour 3) Parts Admin. 4,000 4 4,000/4 meter / Product 4) Machine Support 14,000 10,000 14,000/10,000 1. 4 / Hour 5) Fringe DL 8,000 20,000 8,000/20,000 0. 4 / DL Cost Total 60,000