Classic Pen Company produces writing instruments in four different color inks. Overall profitability is declining even though several models of the pen have substantially higher profit margins than the traditional blue and black ink pens. The controller has been in discussion with the manufacturing manager and has come to the conclusion that part of the problem involves the way the company allocates manufacturing overhead. Recently she has been exposed to Activity Based Costing and has concluded that moving to an ABC system may be beneficial to the company; specifically as to how it determines its product profitability.

The attached case contains all the information that the controller has gathered to begin the implementation:

• a traditional income statement by product,
• sales quantity and pricing data,
• variable costs and fixed overhead (support) costs.
• She has also determined the various activity centers and cost drivers that appear to cover the companys operations.

Assignment: Review all the data provided and:

1. Prepare an analysis of the activity cost pools, including a breakdown of the cost drivers (specify which cost drivers are volume or non-volume based), units of measurement, activity rates and the distribution of support costs for each activity based on the foregoing;
2. Construct an income statement for the various individual products and the combined results based the implementation of an ABC costing system. In this income statement, break down the cost of goods by the following line items - direct material, direct labor and the allocation of support costs by each activity pool. Calculate the Return on Sales for each product line and in total based on Operating Income.
3. Based on your analysis, which product(s) should Classic consider dropping? Round all final figures to the nearest dollar.