Classic Pen

Company
CaseGROUP
Case Background:
ASSIGNMENT
 Classic Pen company was a traditionally a blue and black ink pen manufacturer,
operating at a profit margin of 20%.
 Five years earlier, Dennis Selmor, its sales manager saw an opportunity in other ink
pens and introduced red ink pen, which was made on the same technology of blue/
black and can be sold at 3% premium.
 Last year, purple pen was also introduced as they could command a 10% premium.
 Through ABC costing, Jane Dempsy, finance controller observed that even after sale
of 10,000 units of red and purple pen, the overall gross margins have not increased
but decreased by approx. 8%

Observations:

 To produce the new products, the company has added large number of overheads
for handling production runs/ change in setup.
 The company is making product development decisions based on inaccurate
 information.
 Increasing the price of PURPLE and RED pens is not a viable option for the
company, as pen prices are sold based on a fixed premium driven by market.
 Since physical changeovers account for 40% of indirect labor, color diversification is
costly, especially if volumes are low.

Recommendations:

 Stop taking orders for RED and PURPLE pens, and once orders are fulfilled, color
productions should be discontinued.
 Make longer production runs of BLACK and BLUE to minimize physical changeovers
and thereby reduce associated overheads.