Rinaldo and sons buys T-shirts in bulk applies its own trendsetting silk - scree

Question

Rinaldo and sons buys T-shirts in bulk applies its own trendsetting silk - screen designs and then sells the t shits to a number of retailers. Rinaldo wants to be know for its trendsettin designs and it wants every teenager to be seen in a distinctive Rinaldo T-shirt . Rinaldo prsents the follow data for its first tow years of operations 2012 and 2013

Administrative costs depend on the number of customers that rinaldo has created capacity to support not on the actual number of customers served. Rinaldo had 3700 customers in 2012 and 3600 customers in 2013

Calculate rinaldos operating income in both 2012 and 2013

calculate the growth ,price recovery , and productivity components that explain the change in operating income from 2012 to 2013

Comment on your answers in requirement 2. What does each of these components indicate

Explanation / Answer

Particulars Year 2012 Year 2013 Revenues (No. of T-Shirts Sold*Average Selling Price per T-Shirt) 5200000 6669000 Less:Cost of Goods Sold per T-Shirt -2200000 -2223000 Gross Profit 3000000 4446000 Less: Cost of T-Shirts Discarded (No. of T-shirts Discarded*Cost per T-shirt) -33000 -36000 Less: Administrative Costs -1271000 -1232000 Operating Income 1696000 3178000 Growth Component Changes in Operating Income Revenue Effect of Growth Component (Actual Output Units Sold in 2013-Actual Output Units sold in 2012) Selling Price per Unit in 2012 (247000-200000)26 1222000(Favourable) This component is favourable as it increases Operating Income Cost Effect of Growth Component (Actual Units of input or capacity that would have been used in 2012 to produce 2013 output assuming same input output Relationship that existed in 2012-Actual Units or capacity used in 2012 output)*Input Prices in 2012 Material Purchased Ratio in 2012 Material Purchased/Material Sold 203000/200000=1.015 Applying Input output ratio to 2014 Sales 247000*1.015=250705 (250705-203000)11 524755 UnFavourable (Actual Units of input or capacity that would have been used in 2012 to produce 2013 output assuming same input output Relationship that existed in 2012-Actual Units or capacity used in 2012 output)*Input Prices in 2012 Admininstrative Cost Ratio Capacity of Customers in 2012/Output in 2012 4100/200000 0.0205 Applying Ratio to 2013 Output 247000*.0205 5063.5 (5063.5-4100)*310 298685 Unavourable Net Increase on Opearating Income as a result of Growth Revenue Effect of Growth 1222000 Favourable Less:Cost Effect on Growth Input -524755 Unfavourable Administrative Costs -298685 Unfavourable Net Effect 398560 Price Recovery Component Changes in Operating Income Revenue Effect Price Recovery Component (Output in 2013-Output in 2012)Actual Output sold in 2013 (27-26)247000 247000 Favourable Cost Effect Price Recovery Component (Input Price in 2013-Input Price in 2012) Units Required in 2012 to Produce Output of 2013 assuming Same Input Output Ratio Material (9-11)250705 -501410 Favourable Administrative Costs (320-310)*5063.5 50635 UnFavourable Net Effect of Price Recovery on Increase in Operating Income Revenue Effect 247000 Favourable Cost Effect Materials 501410 Favourable Administrative Costs -50635 UnFavourable Net Effect 697775 Productivity Component Actual Units of Capacity used to Produce 2013 Output- Units that had to be used to produce 2013 Output using 2012 Input Output Relationship)Input Price of 2013 Material (251000-250705)9 2655 Unfavourable Admin (5063.5-3850)320 388320 favourable Net Effect of Productivity Component Material -2655 Admin 388320 Net 385665 Net Increase in Operating Income 1482000 Net Effect on Growth 398560 Net Effect of Price Reciovery 697775 Net Effect on Productivity Component 385665 1482000

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