Classic Pen Co. Case

mere drop a line Co. Case In the past Classic save Company had been the low- make up producer of black and blue pens and had simoleons margins over 20% of sales. Over the last five years Pen Co. decided to start producing red and lofty pens. They require the same staple fiber production technology but can be sold at 3% and 10% premium selling prices. Sales Manager Dennis Selmor is only if seeing the financial results and is not happy with the numbers. The first issue that Pen Co. is facing is their decline in profitability. Even though the numbers describe the red and purple pens ar more 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 addendum of resource be. It requires a substantial amount of time for physical changeover of production from angiotensin converting enzyme colour pen to another. Particularly changing from another colour to red. The nett issue Pen Co. fac es is the increase of make ups related to plan and purchasing activities. Most of the indirect churn costs and computer system costs are related to scheduling and purchasing.Pen Companys declining profitability could be based on the amount of the companys bang. They have unconquerable overhead to be 300% of direct labour costs, when previously the overhead cost was only 200%. The make-up of this overhead is indirect labour, blast benefits, computer systems, machinery, maintenance, and energy. The reason for such a large increase in overhead is because of the melloweder demand for indirect costs due to the addition of more complex and specialized products. While the cost for direct labour per one unit is the same for each colour of pen produced.The cost for indirect labour is made up of three different activities 50% for handling production mental testings ($10,000), 40% for physical changeover or case-hardened up costs ($8,000), and 10% for maintaining records or parts adm inistration ($2,000). The cost for computer systems is made up of two activities 80% for production run activities ($8,000), and 20% for record keeping or parts administration ($2,000). last 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(prenominal)(prenominal) areas of demand in order to increase its profitability similar to what it had been in the past. They need to increase their cookery and try 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 dismantle their indirect labour costs.Finally I recommend they should invest in some more machines to produce the different colour pens in. This would have a high cost of capital but would eventually save the compan y cash in the labour cost and time required for the physical changeover between colours Calculation Page substantiating LabourMachine sustainment manipulation Production Runs = 10,000Machinery = 8,000 Set Up = 8,000Maintenance = 4,000 Parts Administration = 2,000Energy = 2,000 Fringe Indirect Labour = 8,000 come = 14,000 Computer SupportFringe for Direct LabourHandling Production Runs = 8,000Fringe = 8,000 Parts Administration = 2,000 Total Overhead = 60,000 Calculating Activity Rate Activities Activity constitute greet Driver Calculation Activity Rate 1) Handling PR 22,000 one hundred fifty 22,000/150 146. 67 / Run 2) Set Up 12,000 526 12,000/526 22. 81 / second 3) Parts Admin. 4,000 4 4,000/4 1000 / 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