Chapter 12, Problem 12.34P

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.

	2016	2017
1. Units of Orlicon produced and sold	16,000	22,000
2. Selling price	$95	$80
3. Direct materials used (kits*)	20,000	22,000
4. Direct material cost per kit*	$32	$32
5. Manufacturing capacity in kits processed	28,000	26,000
6. Total conversion costs	$560,000	$520,000
7. Conversion cost per unit of capacity (row 6 ÷ row 5)	$20	$20
8. Selling and customer-service capacity	180 customers	180 customers
9. Total selling and customer-service costs	$27,000	$32,400
10. Selling and customer-service capacity cost per customer (row 9 ÷ row 8)	$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 processed, 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.

1. 1. Calculate operating income of Scott Company for 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?