Background

Classic Pens Limited was formed in England in 1987. Fountain pens were a shared passion for
the two founders, Andreas Lambrou and Keith G. Brown. Their principal aim was to create
exclusive fountain pens for pen lovers world-wide. Classic Pen was a low-cost producer of
traditional Blue and Black ink pens and both this pen production uses the same technology.
Classic Pen had a profit margin of at least 20% of sales based on these 2 type pens. On 1993,
Classic Pen introduced Red Pens using same technology at 3% premium and adds on with Purple
Pens using same technology at 10% premium in 1997.
Classic Pen starts facing some issues as more coloured pens are brought in production by the
company. While Red and Purple pens seem to be more profitable, overall profitability of the
company is falling while global competition is getting tougher. Process for Red and Purple pens
requires more resources compared to the traditional pen production by Classic Pen. At the same
time, a lot of time spent on scheduling and purchasing activities by Classic Pen to sustain them
in current market.
Classic Pen practices a traditional based overhead costing which allocates based on the direct
labor cost. At this time the overhead rate was 300% of direct labor cost which increased from
200% of direct labor cost.