1.Based on the income statement from the traditional costing systems.docx
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1.Based on the income statement from the traditional costing systems, make recommendations with respect to the future product line and product introduction2. Identify some signals and symptoms that will justify investing in an alternative costing systems such as ABC. Are there enough signals?Jane Dempsey, controller of the Classic Pen Company, was concerned about the recent financial trends in operating results. Classic Pen had been the low-cost producer of traditional BLUE pens and BLACK pens. Profit margins wereover 20% of sales. Several years earlier Dennis Selmor, the sales manager, had seen opportunities to expand the business by extending the product line into new products that offered premium selling prices over traditional BLUE and BLACK pens. Five years earlier RED pens had been introduced, which required the same basic production technology but could be sold at a 3% premium. And last year PURPLE pens had been introduced because of the 10% premium in selling price they could command. But Dempsey had just seen the financial results (see Exhibit 1) for the most recent fiscal year and was keenly disappointed. The new RED and PURPLE pens do see more profitable than our BLUE and BLACK pens, but overall profitability is down and even the new products are not earning the margins we used to see fromour traditional products. Perhaps this is the tougher global competition I have been reading about. At least the new line, particularly PURPLE pens, is showing much higher margins.
Perhaps we should follow Dennisadvice and introduce �even more specialty colored pens. Dennis claims that consumers are willing to pay higher prices for these specialtycolors. Jeffrey Donald, the manufacturing manager, was also reflecting on the changed environment at Classic Pen: Five years ago, life was a lot simpler. We produced just BLUE andBLACK pens in long production runs, and everything ran smoothly, without much intervention. Difficulties started when the RED pens were introduced and we had to make more changeovers. This required us to stop production, empty