1) A pen manufacturer provides you with the following information about its only product, the

Black pen:

Variable production costs 0.20 per unit

Fixed production cost 1,000 per period

Quantity per period 10,000 units

Selling price 1.00 per unit

• What is the full production cost per pen?
• What is (a) the total gross profit, and (b) the gross profit per pen?

2) The company has decided to diversify and start producing Blue pens and Red pens, in addition to

the original Black pens. The following information is available:

Variable production costs 0.20 per unit

Fixed production cost 3,000 per period

Quantity per colour per period 10,000 units

Selling price per unit Black 1.00; Blue 1.20; Red 1.80

• What is the full production cost per pen?
• What is (a) the total gross profit for each colour pen, and (b) the gross profit per pen?

3) The company continues to produce Black, Blue and Red pens, but the production and sales

volumes have changed, as follows:

Variable production costs 0.20 per unit

Fixed production cost 3,000 per period

Quantity per colour per period 10,000 black; 2,000 blue; 500 red

Selling price per unit Black 1.00; Blue 1.10; Red 1.40

• What is the full production cost per pen?
• What is (a) the total gross profit for each colour pen, and (b) the gross profit per pen?

FOR PARTS (4) - (6) ASSUME THAT THE PRODUCTION VOLUMES IN PART (3) HOLD TRUE

4) The production manager has looked into the different activities that go into producing the pens.

She has provided you with the following information which identifies each activity, and the

portion of the Fixed Production Overhead which relates to each activity:

Assembly 400

Machining 300

Set up 600

Materials handling 800

Quality control 700

Materials procurement 200

Total 3,000

5) The production manager has investigated each activity to find out what causes each activity to

occur ("activity driver"). She provides you with the following information:

Activity Activity driver BLACK BLUE RED

Per batch of 100 pens

Assembly Direct labour hours 1 1 1

Machining Machine hours 0.2 0.2 0.2

Set-up No. of machine setups 1 2 5

Materials handling No. of material movements 2 4 10

Quality control No. of inspections 1 2 5

Materials procurement No. of materials orders 0.5 1 10

• Look at "Assembly". Which colour pen uses this activity most intensively? How would you allocate the 400 overhead between the three pens? Explain it.(E.g. equally, or would one colour be allocated more than another?).
• Look at "Materials Handling". Which colour pen uses this activity most intensively? How would you allocate the 800 overhead between the three pens? Explain it.(E.g. equally, or would one colour be allocated more than another?).

6) Based on the activities and activity drivers above, the production manager has calculated the

overhead to be allocated to each pen, as follows:

Per 100 pens BLACK BLUE RED

VPC (0.20 x 100) 20.00 20.00 20.00

Overhead 19.16 32.75 85.80

Total cost per 100 pens 39.16 52.75 105.80

SP per pen 1.00 1.10 1.40

Cost per pen (0.39) (0.53) (1.06)

GP per pen 0.61 0.57 0.34_

Compare the Gross Profit per pen under Traditional Absorption Costing (TAC) and under Activity

Based Costing (ABC):

• Fill the form TAC: GP per pen

BLACK	BLUE	RED

• If you had to drop one product, which would it be?
• If you could produce more of only one product, which would it be?

ABC: GP per pen BLACK BLUE RED

0.61 0.57 0.34

• If you had to drop one product, which would it be?
• If you could produce more of only one product, which would it be?