Question

Merrill Company makes a household appliance with model number X800. The goal for 2020 is to reduce direct materials usage per unit. No defective units are produced. Manufacturing conversion costs depend on production capacity defined in terms of X800 units that can be produced. The following additional data are available for 2019 and 2020:

	2019	2020
Units of X800 produced and sold	10,000	10,500
Selling price	$100	$96
Direct materials (square feet)	30,000	29,000
Direct material costs per square foot	$10	$10.50
Manufacturing capacity for X800s (units)	12,500	11,500
Total manufacturing conversion costs	$250,000	$218,500
Manufacturing conversion costs per unit of capacity	$20	$19

What is the revenue effect of the growth component of change in operating income, 2019 to 2020?

a) $48,000 Favorable

b) $50,000 Favorable

c) $20,000 Favorable

d) $120,000 Unfavorable

Answer 1

Answer: $35,000 Favorable'

Calculations:

	2019	2020	Favorable/Unfavorable
Sales [10,000*$100]; [10,500*$96]	$1,000,000	$1,008,000	$8,000	Favorable
Less: Expense
Direct materials [30,000*$10]; [29,000*$10.50]	$300,000	$304,500	$4,500	Unfovarable
Conversion costs	$250,000	$218,500	$31,500	Favorable
Operating income	$450,000	$485,000	$35,000	Favorable

the revenue effect of the growth component of change in operating income, 2019 to 2020 is $ 35,000 favorable.