Question

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
Revenues ($)
Direct Materials (Variable)
Conversion costs (Fixed)
Selling and customer service costs (Fixed)
Operating income

Answer 1

Year on Year Revenue is grown up by 16%, hike in revenue is due to two reason:

a. Increase in sale of the number of units i.e. incremental sale of 2,500 units @550 per unit

b. Increase in 10% in sale price per unit i.e. from $500 to $550