Classic Pen Case Presentation

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  • 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
  • Classic Pen Case Presentation

    1. 1. Classic Pen Case Teams 1 & 2 1
    2. 2. Objectives• ABC Analysis• Product Analysis• Recommendations
    3. 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% 2,310Computer 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. 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 ofRecord Keeping 4,451 146 $30.48 Production Runs Number ofMachine Cost 14,051 10,100 $1.39 Machine Hours $53,120 4
    5. 5. Allocation Blue PenUnits Produced 51,400 Activity Rate Activity Total UnitSales $88,408 $1.72Material Costs $29,298 $0.57Direct Labor & Fringe Benefits $16,839 $0.33Scheduling & Production Costs $158.00 53 $8,374 $0.16Set-Up Costs $19.47 244 $4,748 $0.09Record Keeping Costs $30.48 53 $1,616 $0.03Machine Costs $1.39 5,654 $7,866 $0.15Total Cost $68,740 $1.34Operating Income $19,668 $0.38 Return on Sales 22.2%
    6. 6. ABC by Pen Blue Pen Black Pen Red Pen Purple Pen TotalUnits Produced 51,400 37,400 9,000 900 98,700 Total Unit Total Unit Total Unit Total Unit TotalSales $88,408 $1.72 $64,328 $1.72 $15,930 $1.77 $1,674 $1.86 $170,340Material Costs $29,298 $0.57 $21,318 $0.57 $5,040 $0.56 $468 $0.52 $56,124Direct Labor & Fringe Benefits $16,839 $0.33 $12,252 $0.33 $2,948 $0.33 $295 $0.33 $32,334Scheduling & Production Costs $8,374 $0.16 $6,478 $0.17 $6,478 $0.72 $1,738 $1.93 $23,068Set-Up Costs $4,748 $0.09 $878 $0.02 $5,110 $0.57 $814 $0.90 $11,551Record Keeping Costs $1,616 $0.03 $1,250 $0.03 $1,250 $0.14 $335 $0.37 $4,451Machine Costs $7,866 $0.15 $4,683 $0.13 $1,377 $0.15 $125 $0.14 $14,051Total Cost $68,740 $1.34 $46,859 $1.25 $22,204 $2.47 $3,775 $4.19 $141,578Operating 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. 7. Income Statement Traditional Income Statement Blue Black Red Purple TotalSales $88,408 $64,328 $15,930 $1,674 $170,340Material costs 29,298 21,318 5,040 468 56,124Direct labor 12,028 8,752 2,106 211 23,096Overhead @ 270% 32,475 23,629 5,686 569 62,359Total operating income $14,608 $10,629 $3,098 $427 $28,762Return on sales 17% 17% 19% 25% 17%
    8. 8. Income Statement Traditional Income Statement Blue Black Red Purple TotalSales $88,408 $64,328 $15,930 $1,674 $170,340Material costs 29,298 21,318 5,040 468 56,124Direct labor 12,028 8,752 2,106 211 23,096Overhead @ 270% 32,475 23,629 5,686 569 62,359Total operating income $14,608 $10,629 $3,098 $427 $28,762Return on sales 17% 17% 19% 25% 17% ABC Income Statement Blue Black Red Purple TotalSales $88,408 $64,328 $15,930 $1,674 $170,340Material costs 29,298 21,318 5,040 468 56,124Direct labor 16,839 12,252 2,948 295 32,334Overhead @ 270% 22,603 13,289 14,215 3,013 53,120Total operating income $19,668 $17,469 ($6,274) ($2,101) $28,762Return on sales 22% 27% (39%) (126%) 17%
    9. 9. Total Operating Income 22% 27% 17% 17% 19% 25% -126% -39%
    10. 10. Overhead Allocation
    11. 11. Traditional Unit Cost $2.00 $2.00 $1.60 $1.60Per 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. 12. Unit Cost Comparison $2.00 $2.00 $1.60 $1.60Per 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. 13. ABC Unit Cost Blue Pen Black Pen Red Pen Purple PenUnits Produced 51,400 37,400 9,000 900 Unit Unit Unit UnitSales $1.72 $1.72 $1.77 $1.86Material Costs $0.57 $0.57 $0.56 $0.52Direct Labor & Fringe Benefits $0.33 $0.33 $0.33 $0.33Scheduling & Production Costs $0.16 $0.17 $0.72 $1.93Set-Up Costs $0.09 $0.02 $0.57 $0.90Record Keeping Costs $0.03 $0.03 $0.14 $0.37Machine Costs $0.15 $0.13 $0.15 $0.14Total Cost $1.34 $1.25 $2.47 $4.19Operating Income $0.38 $0.47 ($0.70) ($2.33) Return on Sales
    14. 14. ABC Unit Cost Blue Pen Black Pen Red Pen Purple PenUnits Produced 51,400 37,400 9,000 900 Unit Unit Unit UnitSales $1.72 $1.72 $1.77 $1.86Material Costs $0.57 $0.57 $0.56 $0.52Direct Labor & Fringe Benefits $0.33 $0.33 $0.33 $0.33Scheduling & Production Costs $0.16 $0.17 $0.72 $1.93Set-Up Costs $0.09 $0.02 $0.57 $0.90Record Keeping Costs $0.03 $0.03 $0.14 $0.37Machine Costs $0.15 $0.13 $0.15 $0.14Total Cost $1.34 $1.25 $2.47 $4.19Operating Income $0.38 $0.47 ($0.70) ($2.33) Return on Sales
    15. 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. 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. 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
    18. 18. Increased Return on Sales
    19. 19. Questions 19

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