Following a strategy of product differentiation, Americonic Corporation makes a

Question

Following a strategy of product differentiation, Americonic Corporation makes a high-end computer monitor Americonic Corporation presents the following data for the years 2017 and 2018 Units produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity (units) Conversion costs Co 2017 6,000 S420 16,000 $40 10,000 $1,000,000 S100 60 5360,000 56,000 2018 6,500 $440 16,375 544 10,000 $1,100,000 S110 58 S362,500 nversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit in 2018 Manufacturing conversion costs in each year depend on production capacity defined in terms of 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. Ernsting Corporation has 100 customers in 2017 and 115 customers in 2018. The industry market size for high-end computer monitors increased 5% from 2017 to 2018 Required a. What is the revenue effect of the growth component? b. What is the cost effect of the growth component? c. What is the net effect on operating income as a result of the growth component?

Explanation / Answer

REVENUE EFFECT 2017 2018 CHANGE(+/-) No. of units sold              6,000               6,500                   500 Per unit price                  420                   440                     20 Sales Revenue      2,520,000       2,860,000          340,000 Effect on revenue is increase of $ 340,000 COST EFFECT Direct Material (pounds)            16,000             16,375 Direct Material price per pound                    40                     44 Direct Material Cost         640,000          720,500          (80,500) Conversion Cosst per unit                  100                   110 Manufacturing capacity (units)            10,000             10,000 Converion cost         600,000          715,000        (115,000) Selling and customer service cost         360,000          362,500             (2,500) TOTAL      1,600,000       1,798,000        (198,000) Effect on cost is increase of $ 198,000 NET EFFECT ON OPERATING INCOME Sales Revenue Increase 340000 Cost Increase 198000 Net Operating income Increase 142000 Notes: It is presumed that all the costs are variable and there is no element of fixed costs included in these.

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