Question

Following a strategy of product differentiation, Despotovich Corporation makes a high-end Computer Monitor, CM12. Despotovich Corporation presents the following data for the years 1 and 2: Year 1 Year 2 Units of CM12 produced and sold 5,000 5,500 Selling price $400 $440 Direct materials (pounds) 15,000 15,375 Direct materials costs per kilogram $40 $14 Manufacturing capacity for CM12 (units) 10,000 10,000 Total manufacturing conversion costs $500,000 $550,000 Manufacturing conversion costs per unit of capacity $50 $55 Selling and customer service capacity (customers) 60 58 Total selling and customer service costs $180,000 $181,250 Cost per customer of selling & customer-service capacity $3,000 $3,125 Despotovich Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM12 in Year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM12 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer service costs are affected by changes in actual volume. Despotovich Corporation has 46 customers in Year 1 and 50 customers in Year 2. The industry market size for high-end computer monitors increased 5% from Year 1 to Year 2. Of the S40 increase in unit selling price, $10 was attributable to a general increase in prices. Required: a What is the operating income for Year 1? b. What is the operating income in Year 2? What is the change in operating income from Year 1 to Year 22 d. What amount is the revenue effect of growth component? e. What amount is the cost effect of growth component? 1 What is the change in operating income as a result of the growth component? 8. What amount is the revenue effect of price recovery component? h. What amount is the cost effect of price recovery component? What is the change in income as a result of the price recovery component? What is the amount of the productivity component? k. The change in operating income from cost leadership The change in operating income due to industry wide effects. m. The effect of product differentiation on operating income and a summarization of the change in operating income between Year 1 and Year 2

Answer 1

1)	Operating Income in year 1
	Particular	Year 1
	Units Sold	5000
	Selling Price	400
	Total Sales (A)	2000000
	Direct Materials	15000
	Direct Materials Cost per Sq Ft	40
	Total Materials Cost (B)	600000
	Total Conversion Cost (C)	500000
	Conversion cost per unit	50
	Capacity	10000
	Selling and Customer Service Capacity	60
	Selling and Customer Service Cost (D)	180000
	Selling and Customer Service Cost Per Customer	3000
	Operating Income (A-B-C-D)	720000

2)	Operating Income in year 2
	Particular	Year 2
	Units Sold	5500
	Selling Price	440
	Total Sales (A)	2420000
	Direct Materials	15375
	Direct Materials Cost per Sq Ft	44
	Total Materials Cost (B)	676500
	Total Conversion Cost (C)	550000
	Conversion cost per unit	55
	Capacity	10000
	Selling and Customer Service Capacity	58
	Selling and Customer Service Cost (D)	181250
	Selling and Customer Service Cost Per Customer	3125
	Operating Income (A-B-C-D)	1012250

C) Change in operating income from year 1 to year 2

(Operating income year2 - Operating income year1)/operating income year1

= (1012250 - 720000)/720000

=40.59%

d) Revenue Effect of growth = (units sold in year2 - units sold in year 1) * year1's selling price

= (5500-5000)*400

= 200000