Chapter 12, Problem 12.26E

Strategic analysis of operating income (continuation of 12-25). Refer to Exercise 12-25.

1. 1. Calculate the operating income of Stanmore Corporation in 2016 and 2017.
2. 2. Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2016 to 2017.
3. 3. Comment on your answer in requirement 2. What do these components indicate?

12-25 Strategy, balanced scorecard. Stanmore Corporation makes a special-purpose machine, D4H, used in the textile industry. Stanmore has designed the D4H machine for 2017 to be distinct from its competitors. It has been generally regarded as a superior machine. Stanmore presents the following data for 2016 and 2017.

	2016	2017
1. Units of D4H produced and sold	200	210
2. Selling price	$40,000	$42,000
3. Direct materials (kilograms)	300,000	310,000
4. Direct material cost per kilogram	$8	$8.50
5. Manufacturing capacity in units of D4H	250	250
6. Total conversion costs	$2,000,000	$2,025,000
7. Conversion cost per unit of capacity (row 6 ÷ row 5)	$8,000	$8,100
8. Selling and customer-service capacity	100 customers	95 customers
9. Total selling and customer-service costs	$1,000,000	$940,500
10. Selling and customer-service capacity cost per customer (row 9 ÷ row 8)	$10,000	$9,900

Stanmore produces no defective machines, but it wants to reduce direct materials usage per D4H machine in 2017. Conversion costs in each year depend on production capacity defined in terms of D4H units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Stanmore can support, not the actual number of customers it serves. Stanmore has 75 customers in 2016 and 80 customers in 2017.

1. 1. Is Stanmore’s strategy one of product differentiation or cost leadership? Explain briefly.
2. 2. Describe briefly key measures that you would include in Stanmore’s balanced scorecard and the reasons for doing so.