2017 2016 1. Units of Orlicon produced and sold 2. Selling price 16,000 22,000 $95 $80 3. Direct materials used (kits) 20,000 22,000 4. Direct material cost per kit 5. Manufacturing capacity in kits processed $32 $32 26,000 28,000 6. Total conversion costs $560,000 $520,000 7. Conversion cost per unit of capacity (row 6 ÷ row 5) 8. Selling and customer-service capacity 9. Total selling and customer-service costs 10. Selling and customer-service capacity cost per customer (row 9 + row 8) $20 $20 180 customers 180 customers $27,000 $32,400 $150 $180 *A kit is composed of all the major components needed to produce a DVD player. Conversion costs in each year depend on production capacity defined in terms of kits that can be pro- cessed, not the actual kits started. Selling and customer-service costs depend on the number of customers that Scott can support, not the actual number of customers it serves. Scott has 140 customers in 2016 and 160 customers in 2017. Calculate operating income of Scott Company for 2016 and 2017. Calculate the growth, price-recovery, and productivity components that explain the change in operat- ing income from 2016 to 2017. Comment on your answer in requirement 2. What do these components indicate? Required 1. 2. 3.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Strategic analysis of operating income (continuation of 12-33). Refer to Problem 12-33. As a result of the actions taken, quality has significantly improved in 2017 while rework and unit costs of the Orlicon have decreased. Scott has reduced manufacturing capacity because capacity is no longer needed to support rework. Scott has also lowered the Orlicon’s selling price to gain market share and unit sales have increased. Information about the current period (2017) and last period (2016) follows.

2017
2016
1. Units of Orlicon produced and sold
2. Selling price
16,000
22,000
$95
$80
3. Direct materials used (kits*)
20,000
22,000
4. Direct material cost per kit*
5. Manufacturing capacity in kits processed
$32
$32
26,000
28,000
6. Total conversion costs
$560,000
$520,000
7. Conversion cost per unit of capacity (row 6 ÷ row 5)
8. Selling and customer-service capacity
9. Total selling and customer-service costs
10. Selling and customer-service capacity cost per customer
(row 9 + row 8)
$20
$20
180 customers
180 customers
$27,000
$32,400
$150
$180
*A kit is composed of all the major components needed to produce a DVD player.
Conversion costs in each year depend on production capacity defined in terms of kits that can be pro-
cessed, not the actual kits started. Selling and customer-service costs depend on the number of customers
that Scott can support, not the actual number of customers it serves. Scott has 140 customers in 2016 and
160 customers in 2017.
Calculate operating income of Scott Company for 2016 and 2017.
Calculate the growth, price-recovery, and productivity components that explain the change in operat-
ing income from 2016 to 2017.
Comment on your answer in requirement 2. What do these components indicate?
Required
1.
2.
3.

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