Question

How do I answer k, l, and m?

Following a strategy of product differentiation, Instruments Inc. makes a handheld calculator, II 400. Instruments Inc. presents the following data for the years 1 and 2:

                                                                                                           Year 1 Year 2

Units of II400 produced and sold                                            50,000  52,500

Selling price                                                                                      $40  $44

Direct materials (kilograms)                                                150,000  153,375

Direct materials costs per kilogram                                        $4.00  $4.40

Manufacturing capacity for II400 (units)                            62,500  62,500

Total manufacturing conversion costs                           $500,000  $550,000

Manufacturing conversion costs per unit of capacity       $8.00  $8.80

Selling and customer-service capacity (customers)                 30  29

Total selling and customer-service costs                      $360,000  $362,500

Cost/ customer of selling & customer-service capacity $12,000  $12,500

  

Instruments Inc. produces no defective units, but it wants to reduce direct materials usage per unit of II 400 in year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of II400 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. Instruments Inc. has 23 customers in year 1 and 25 customers in year 2. The industry market size for handheld calculators increased 5% from year 1 to year 2. Of the $4 increase in unit selling price, $1 is due to a general increase in prices.

a.  What is the operating income for Year 1? $540,000

b. What is the operating income in Year 2? $722,650

c.  What is the change in operating income from Year 1 to Year 2? $182,640 Favourable  

d.  What amount is the revenue effect of the growth component? $100,000 Favourable  

e.  What amount is the cost effect of the growth component? $30,000 Unfavourable  

f.   What is the net effect on operating income as a result of the growth component? $70,000 Favourable

g.  What amount is the revenue effect of the price-recovery component? $210,000 Favourable

h.  What amount is the cost effect of the price-recovery component? $128,000 Unfavourable

i.   What is the net change in operating income as a result of the price-recovery component? $82,000 Favourable

j.   What is the net effect on operating income as a result of the productivity component? $30,650 Favourable

k.  The change in operating income from cost leadership.

l.   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 to Year 2.

Answer 1

(a) and (b)Statement Showing "Operating Income of Distribution Channels of Calculate Inc.(For Year 1 and Yaer 2)."

Particulars	Year 1	Year 2
Sales	20,00,000 (50,000*$40)	25,30,000 (55,000*$46)
Less:Direct Material	9,00,000 (1,50,000*$6)	9,85,563 (1,51,625*$6.50)
Less: Manfacturing Coversion Cost	4,00,000 (50,000*$8)	4,95,000 (55,000*$9)
Less: Selling and Conversion Service Cost	2,07,000 ($9000*23)	2,37,500 ($9500*25)
Operating Income	4,93,000	8,11,937

(c) Change in the Operating Income from year 1 to Year2:-

Operating Income in Year 1    4,93,000

Operating Income in Year 2. 8,11,937

Increase in Operating Income 3,18,937

(d)Revenue Effect of the Growth Component:-

=(Actual units of Output Sold in Year 2 - Actual units of Output Sold in Year 1)*Selling Price in Year 1

=(55,000-50,000)*40

=$2,00,000(F)

(e)Cost Effect of the Growth Component:-( Variaable cost)

Direct Material:-

=(Direct Material Required to Produce 55,000 units in Year 1- Direct Materials Used To Produce 50,000 Units In Year 1)*Cost Per kg in Year 1

=(1,50,000/50,000 *55,000-1,50,000)*$6

=$90,000(A)

(g)Revenue Effect of Price Recovery Component:-

=(Selling Price in Year 2- Selling Price in Year 1)*Actual Units of output sold in Year 2

=($46-$40)*55,000

=$3,30,000(F)

(d)Cost Effect of Price Recovery Component:-

Direct Material:-

=(Direct Material Price in Year 2- Direct Material Price in Year 1)*Direct material Required to Produce 55,000 units in Year 1

=($6.50-$6)*1,65,000

=$82,500(A)

(m)Reconicilliation of Opertaing Income from Year 1 to Year 2:-

Particulars	Amount	Amount
Operating Profit in Year 1		4,93,000
Add:-Revenue Effect of Growth Component	2,00,000
Revenue Effect of Price Recovery	3,30,000
Productivity Component
Less:-Cost Effect of Growth Component Cost Effcet of Price Recovery Component	90,000 82,500