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Date: 01/01/201178cf55a02e341d5fc2e1eb6b50049750910fbc2e.xlsPaul M. Goldwater Ph.D., School of Accounting, University of Central Florida1 of 2Student:1234 AllStudentsBut Dempsey had just seen the financial results (see Exhibit 1) for the most recent fiscal year and was keenly disappointed.Jeffrey Donald, the manufacturing manager, was also reflecting on the changed environment at Classic Pen:cExhibit 1Traditional Income StatementBlueBlackRedPurpleTotalSales$88,408$64,328$15,930$1,674$170,340Material costs29,29821,3185,04046856,124Direct labor12,0288,7522,10621123,096Overhead @ 270%32,47523,6295,68656962,359Total operating income$14,608$10,629$3,098$427$28,762Return on sales17%17%19%25%17%OperationsActivity-Based CostingActivity-Based Cost AnalysisDempsey first identified six categories of support expenses that were currently being allocated to pen production:Expense CategoryExpenseIndirect labor$20,626Fringe benefits17,489Computer systems10,193Machinery7,396Maintenance4,437Energy2,218Total$62,359Jane 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 were over 22% 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; they 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 8% premium in selling price they could command.The new RED and PURPLE pens do seem 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 from our 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 Dennis's advice and introduce even more specialty colored pens. Dennis claims that consumers are willing to pay higher prices for these specialty colors.