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Panda Company

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Submitted By kiamee01
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Case Summary

Panda has been the low – cost producer of traditional BLUE and BLACK pens. Profit margins were over 20% of sales. Five years earlier, RED pens had been introduced and were sold at 3% premium. Last year, PURPLE pens were sold at 10% premium. RED and PURPLE pens seem more profitable than BLUE and BLACK but overall profitability is down. Jane Mendez was disappointed with the financial results. Jeffrey Donald, the manufacturing manager, said life was simpler when they just produced BLUE and BLACK pens. Difficulties started arising when they started RED pens. They needed to stop production, empty the vats, clean out all remnants of the previous color and start production of red ink. Direct labor cost is 300%, while a few years back it was only 200%.
Activity-Based Costing: * Indirect labor * 50% of the indirect labor costs are caused by Production run * 40% of the indirect labor cost were caused by the physical change from one color to another called setup costs * 10% of the time was used to an activity Parts Administration (Book keeping) * Computer Expenses * 20% allocated to support activities (Parts admin.) * 80% of computer resources were used to produce batches and are closely related to handling of production batches

ACA No. 3. Eliminate RED and PURPLE pens in the production and go back to the original product line. (use traditional costing only)

PROS: * No drastic changes needed since they are used to it * Less time needed in product turnover since dark – colored ink will be used *

CONS: * Less globally competitive (Not part of market of colored pens) * Previous customers who avail of the RED and PURPLE pens will be dismayed and thus have to look elsewhere to purchase these products *

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