Following a strategy of product differentiation, Arseniq Company makes a high-end Appliance, XT15. Arseniq presents the following data for the years 2016 and 2017:
2016 2017
Units of XT15 produced and sold 50,000 52,500
Selling price $500 $550
Direct materials (square feet) 150,000 153,750
Direct materials costs per square foot $50 $55
Manufacturing capacity in units of XT15 62,500 62,500
Total conversion costs $6,250,000 $6,875,000
Conversion costs per unit of capacity $100 $110
Selling and customer-service capacity (customers) 150 150
Total selling and customer-service costs $2,250,000 $2,343,750
Selling and customer-service capacity cost per customer $15,000 $15,625
Arseniq produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Arseniq had 140 customers in 2016 and 145 customers in 2017.
Income Statement Amounts in 2016 |
Revenue and Cost Effects of Growth Component in 2017 |
Revenue and Cost Effects of Price-Recovery Component in 2017 |
Cost Effect of Productivity Component in 2017 |
Income Statement Amounts in 2017 |
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Revenues ($) |
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Direct Materials (Variable) |
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Conversion costs (Fixed) |
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Selling and customer service costs (Fixed) |
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Operating income |
Combine Income Statement | ||||
Particular | 2016 | Calculation | 2017 | Calculation |
Revenue | $25,000,000 | 50000*500 | $28,875,000 | 52500*550 |
Direct Matrial | $7,500,000 | 150000*50 | $8,456,250 | 153750*55 |
Conversion Cost | $5,000,000 | 50000*100 | $5,250,000 | 52500*100 |
Selling & Customer Service Cost | $2,100,000 | 15000*140 | $2,175,000 | 15000*145 |
Operating Income | $10,400,000 | $12,993,750 |
Particular | 2016 | 2017 |
Revenue | ||
Direct Material | 30% | 29% |
Conversion Cost | 20% | 18% |
Selling & Custom | 8% | 8% |
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