Following a Strategy of Product Differentiation, Somerset Corporation Makes a High-End

question 142

Essay

Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2017 and 2018:

Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2017. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 100 customers in 2017 and 115 customers in 2018. The industry market size for high-end computer monitors increased 5% from 2017 to 2018.
Required:
a.What is the revenue effect of the price-recovery component?
b.What is the cost effect of the price-recovery component?
c.What is the net effect on operating income as a result of the price-recovery component?
d.What is the net effect on operating income as a result of the productivity component?

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Definitions:

Fixed Costs

Expenses that do not change with the level of goods or services a business produces, such as rent, salaries, and loan payments.

Pen Rentals

The service of lending pens, typically for temporary use, possibly related to specific events or locations where writing instruments are required.

Monthly Profit

The net income achieved by a business over the course of a single calendar month after all expenses have been deducted from total revenue.

Self-Propelled

Refers to machines or vehicles that are equipped with their own means of propulsion, allowing them to move without external assistance.