Question

Can I please get help on how to calculate; 2018 2019 Units produced and sold 6,000...

Can I please get help on how to calculate;

2018 2019

Units produced and sold 6,000 6,500

Selling price $420 $440

Direct materials (pounds) 16,000 16,375

Direct materials costs per pound $40 $44

Manufacturing capacity (units) 10,000 10,000

Conversion costs $1,000,000 $1,100,000

Conversion costs per unit of capacity $100 $110

Selling and customer-service capacity (customers)   62 60

Total selling and customer-service costs $361,000 $363,500

Selling and customer-service capacity cost

per customer $6,500 $6,750

a. Calculate the revenue effect and cost effect (variable and fixed costs effects) of the price-recovery component, and the net effect on operating income as a result of the price-recovery component. Comment on what these components indicate

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Answer #1
a)
Revenue effect of price-recovery = ( selling price in 2019 - selling price in 2018 ) x Actual units of output sold in 2019
Revenue effect of price-recovery = ($440 - $420) x 6,500 $ 130,000.00 F
b)
Cost effect of price-recovery for variable costs = (Input price in 2019 - Input price in 2018) x Units of input required to produce 2019 output in 2018
Units of input required to produce 2019 output in 2018 = 16000/6000 x 6500       17,333.33
Cost effect of price-recovery for direct materials = ($44 - $40) × 17,333.33       69,333.33 U
Cost effect of price-recovery for conversion costs = ($110- $100) x 10000     100,000.00 U
Cost effect of price-recovery for selling and customer-service costs = ($6,750 - $6,500) × 60 =       15,000.00 U
Cost effect of the price-recovery component (69,333+100000+15000)     184,333.33 U
c)
Net effect on operating income as a result of the price-recovery component  ($130,000 - $184,333.33) $   54,333.33 U
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