Question

question 19

following a strategy of product differentiation , Barry company makes an XX 300 . Barry company presents the following data for the years 1 and 2

year 1 year 2

units of xx 300 produced and sold 10000 10800

selling price $100 $115

direct material (litres) 30000 31900

direct material costs per liter $15 $16

manufacturing capacity for xx 300 (units) 12500 12500

total manufacturing conversion costs $250000 275000

manufacturing conversion costs per unit of capacity $20 $22

selling and customer service capacity (customers) 30 29

total selling and customers service costs $90000 90625

cost per customer of selling & customer service capacity 3000 $3120

Barry company produces no defective units but it wants to reduce direct materials usage per unit of xx 300 in year 2 . manufacturing conversion costs in each year depend on production capacity defined in terms of xx 300 units that can be produced selling and customer service costs depend on the number of customers that the customers and service functions are designed to support .neither conversion costs or customer service costs are affected by changes in actual volume . Barry company has 23 customers in year 1 and 25 customers in year 2 the industry market size for high end appliances increased 5% from year 1 to year 2

1- what is the Barry company productivity component of change in operating income ?

2-what is the Barry company net increase in operating income as a result of the price recovery component ?

Answer 1

Answer 1 (Change in profit due to productivity component)

Year 2 at year 1 quantities Particulars Year 1 Year 2 10,000 100 1,000,000 10,800 115 1,242,000 10,800 115 1,242,000 30,000 31,900 32,400 15 16 16 450,000 510,400 518,400 12,500 12,500 12,500 Sales Unit Selling Price Sales Direct Material in liters Direct material cost per liter Direct Material costs Manufacturing Capacity in units Manufacturing conversion cost per unit Manufacturing conversion cost Selling & Customer Service capacity Costs per selling & customer service capacity Selling & Customer Service capacity Customers - 20 22 22 250,000 275,000 275,000 30 29 3,000 3,120 3,120 90,000 90,480 90,480 25 23 Operating Income 210,000 366,120 358,120

The quantity of direct material that should have been used by the company is 32,400 units for 10,800 level of output. (30,000*10,800/10,000). However, the company has used only 31,900 units for 10,800 level of output.

Hence, due to less material usage company saved = 8000$ ((32400-31900)*16)

Answer 2 (Change in profit due to price component)

Particulars	Year 1	Year 2	Year 2 at year 1 quantities
Sales Unit	10,000	10,800	10,800
Selling Price	100	115	115
Sales	1,000,000	1,242,000	1,242,000
Direct Material in liters	30,000	31,900	32,400
Direct material cost per liter	15	16	15
Direct Material costs	450,000	510,400	486,000
Manufacturing Capacity in units	12,500	12,500	12,500
Manufacturing conversion cost per unit	20	22	22
Manufacturing conversion cost	250,000	275,000	275,000
Selling & Customer Service capacity	30	29	29
Costs per selling & customer service capacity	3,000	3,120	3,120
Selling & Customer Service capacity	90,000	90,480	90,480
Customers	23	25
Operating Income	210,000	366,120	390,520

Due to change in prices of material from 15$ to 16$, the company lost 24,400$.