Classic Pen Company: Developing an ABC model

The classic company was a producer of low-cost BLUE and BLACK pens with a profit margin of 20%.
Gauging the opportunity in coloured pens, the company launched PURPLE and RED pens at a
premium. However, instead of increasing profits, the company witnessed a decline in profit. The
unit/cost and overhead charges of new products were more than old products. They followed a
traditional method of costing in which all the costs were equally distributed in all the products
whereas the cost contribution of new products was higher than the old products.

For this reason, their profits were declining. In this case, we learned about ABC based costing, in
which all costs were traced back to the individual product and then their cost is derived. Based on
this costing, the final selling price is set. The costs which cannot be traced should be taken
separately. Later, after introspecting with ABC costing method, the company realized that it had to
increase the price of RED and PURPLE pens.