Chapter 12, Problem 12.30E

Strategic analysis of operating income (continuation of 12-29). Refer to Exercise 12-29.

1. 1. Calculate the operating income of Compton Associates in 2016 and 2017.

Required

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

12-29 Strategy, balanced scorecard, service company. Compton Associates is an architectural firm that has been in practice only a few years. Because it is a relatively new firm, the market for the firm’s services is very competitive. To compete successfully, Compton must deliver quality services at a low cost. Compton presents the following data for 2016 and 2017.

	2016	2017
1. Number of jobs billed	40	50
2. Selling price per job	$32,000	$30,000
3. Architect labor-hours	24,000	27,000
4. Cost per architect labor-hour	$35	$36
5. Architect support capacity (number of jobs the firm can do)	60	60
6. Total cost of software-implementation support	$168,000	$180,000
7. Software-implementation support-capacity cost per job (row 6 ÷ row 5)	$2,800	$3,000

Architect labor-hour costs are variable costs. Architect support costs for each year depend on the Architect support capacity that Compton chooses to maintain each year (that is, the number of jobs it can do each year). Architect support costs do not vary with the actual number of jobs done that year.

1. 1. Is Compton Associate’s strategy one of product differentiation or cost leadership? Explain briefly.

Required

1. 2. Describe key measures you would include in Compton’s balanced scorecard and your reasons for doing so.