Chapter 16, Problem 44P

1.

To determine

Prepare summary of contribution income statement for two years and determine the changes in operating income.

Explanation of Solution

"C" Company                                                                                                                  Comparative Income Statement                                                                                                 For the year ended
		Current year		Prior year
Sales	20,000 × $40	$800,000	16,000 × $40	$640,000
Variable cost of sales:
Direct materials	14,000 × $10	$140,000	13,000 × $8	$104,000
Direct labor	5,250 × $25	$131,250	6000×$20	$120,000
Power	2,000 × $2	$4,000	1,000 × $2	$2,000
Total variable costs of sales		$275,250		$226,000
Contribution margin		$524,750		$414,000

Compute the changes in operating net income:

$\begin{array}{c}\begin{array}{l}\text{Changes in }\\ \text{operating income}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Contribution margin for current year}\\ -\text{Contribution margin for prior year}\end{array}\right)\\ \text{= }\$524,750-\$414,000\\ \text{= }\$110,750\end{array}$

2.

To determine

Determine the partial operational productivity for each production factor.

Explanation of Solution

Particulars	Current year		Prior year
Total direct materials cost	$140,000.00	( 14,000×$10)	$104,000.00	( 14,000×$8)
Total direct labor cost	$131,250.00	(5,250×$25)	$120,000.00	(5,250×$25)
Total power cost	$4,000.00	(2,000×$2)	$2,000.00	(1,000×$2)
Operational partial productivity
Direct materials	$1.4286	(20,000 by $14,000)	0.1538	(16,000 by $14,000)
Direct labor	$3.8095	(20,000 by $5,250)	0.1333	(16,000 by $5,250)
Power	$10.0000	(20,000 by $2,000)	8.0000	(16,000 by $2,000)
Current output prior year productivity
Direct materials	$16,250	(20,000 by $1.2308)
Direct labor	$7,500	(20,000 by $2.6667)
Power	$1,250	(20,000 by $16)

3.

To determine

Determine the partial financial productivity for each production factor.

Explanation of Solution

Particulars	Current year		Prior year
Total direct materials cost	$140,000.00	( 14,000×$10)	$104,000.00	( 14,000×$8)
Total direct labor cost	$131,250.00	(5,250×$25)	$120,000.00	(5,250×$25)
Total power cost	$4,000.00	(2,000×$2)	$2,000.00	(1,000×$2)
Financial partial productivity
Direct materials	$0.1429	(20,000 by $140,000)	$0.1538	(16,000 by $104,000)
Direct labor	$0.1524	(20,000 by $131,250)	$0.1333	(16,000 by $120,000)
Power	$5.0000	(20,000 by $4,000)	$8.0000	(16,000 by $2,000)
Operational partial productivity
Direct materials	$1.4286	(20,000 by $14,000)	0.1538	(16,000 by $14,000)
Direct labor	$3.8095	(20,000 by $5,250)	0.1333	(16,000 by $5,250)
Power	$10.0000	(20,000 by $2,000)	8.0000	(16,000 by $2,000)
Current output prior year productivity
Direct materials	$16,250	(20,000 by $1.2308)
Direct labor	$7,500	(20,000 by $2.6667)
Power	$1,250	(20,000 by $16)

4.

To determine

Explain the conclusions about the productivity of the firm.

Explanation of Solution

The productivity of direct materials and direct labor is increased compared to the previous year to current year. During the current year, the company is under a situation to manufacture the more output unit for each unit of material used in production. The operational productivity in the current year is decreased compared to the previous year.

The financial partial productivity for labor is increased. Thus, decrease in the financial productivity will increase the direct labor wage rate.

5.

To determine

Prepare schedule to changes in partial financial productivity ratios from previous year to current year.

Explanation of Solution

The schedule of changes in partial financial productivity ratios from previous year to current year is as follows:

Current output prior year productivity	(A) Current input cost	Change in productivity (A-B)	(B) Current input cost	Change in input price          (B-C)	(C ) Prior input cost	Output changes (C-D)	(D ) Prior input cost	Total Changes
Direct materials	$0.1429	$0.0198	0.1231	-$0.0308	$0.1539	$0.0001	$0.1538		-$0.0109
Direct labor	$0.1524	$0.0457	0.1067	-$0.0266	$0.1333	$0.00	$0.1333		$0.0191
Power	$5.0000	-$3.0000	8.0000	$0.00	$8.0000	$0.00	$8.0000		-$3.0000

6.

To determine

Indicate whether the detailed information will provide any additional insight about the relative productivity of “C”.

Explanation of Solution

The productivity of direct materials and direct labor is increased compared to the previous year to current year. Hence, increase in cost of direct materials and direct labor will decrease the amount of gain in productivity of both the manufacturing companies.