Classic Pen Company: ABC Model Free Essay, Term Paper and Book Report
Classic Pen Company, originally producing only black and blue pens, decided to expand its product line by introducing new colors to the market. Based on the traditional financial data in comparison to the previous year, it was evident that the overhead costs increased dramatically from 200% to 300%. Furthermore, sales eroded from 20% to 13.5% since the introduction of the new products. Currently, based on traditional cost allocation, overhead cost is allocated at 300% of direct labor cost, or $30,000 for Blue, $24,000 for Black, $5,400 for Red and $600 for Purple. The traditional income statement reflected a gross profit of $20,370. The traditional Blue and Black pens generated a profit of $10,000 and $8,000 respectively. Two colors introduced, Red and Purple, generated an operating income of $2,070 and $300 respectively (see Exhibit 6).
Based on Activity-Based Costing system, overhead costs for Blue pens decreased from $30,000 to $21,091.50. Overhead costs for Black pens also decreased, from $24,000 to $15,998. However, overhead costs for Red pens increased from $5,400 to $12,137......
Word Count: 562
Page Count: 2.2 (250 words a page / double spaced)
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