EXHIBIT 1 Traditional Income Statement

	BLUE	BLACK	RED	PURPLE	TOTAL
Sales	$80,000	$64,000	$13,200	$3,500	$160,700
Material cost	27,500	22,000	4,560	1200	55,260
Direct labour	6,250	5,000	1,000	250	12,500
Overhead @ 520%	32,500	26,000	5,200	1,300	65,000
Total operating income	$13,750	$11,000	$2,440	$750	$27,940
Return on sales	17.19%	17.19%	18.49%	21.43%	17.39%

Exhibit 2 Direct Costs and Activity Cost Drivers

	BLUE	BLACK	RED	PURPLE	TOTAL
Production sales volume (no. of units)	50,000	40,000	8,000	2,000	100,000
Unit selling price	$1.60	$1.60	$1.65	$1.75
Materials/ unit cost	$0.55	$0.55	$0.57	$0.60
Direct labor hr/unit	0.02	0.02	0.02	0.02	2,000
Machine hour/ unit	0.1	0.1	0.1	0.1	10,000
No. of production runs	50	50	38	12	150
Setup time/ run (hours)	4	1	6	4
Total set up time (hours)	200	50	228	48	526
Number of products	1	1	1	1	4

Required

Assume you have been hired as an independent consultant to identify and comment on several aspects of this case which are listed below (see questions, parts (a) - (f)). You should address your report to the Board of Directors of Modern Pen Company. Your report needs to include an Executive Summary. You need to support your arguments with relevant references where appropriate. The references can be drawn from internationally recognised peer reviewed journals as well.

1. How did the market for pens change over time? What could be the forces for change? Explain in detail.
2. Explain how management accounting change applies to this case study. Try to relate your answer to the Burns and Scapens (2000) reading.
3. Estimate the costs for the four pen products using an activity-based approach.
4. What are the managerial implications from the revised cost estimates?
5. How is activity-based costing approach a superior costing method when compared to traditional costing approaches? What are the criticisms of activity-based costing approach? Explain in detail.
6. How would you approach the setting up of an activity-based costing system for the business and what behavioural problems do you think you might encounter?

(You should limit your report to a maximum of 2,500 words. Tables, figures and references may be additional).