Use the Information Below to Answer the Following Question(s)

question 132

Essay

Use the information below to answer the following question(s).
Following a strategy of product differentiation,Instruments Inc.makes a hand held calculator,II400.Instruments Inc.presents the following data for the years 1 and 2:
Instruments Inc.produces no defective units but it wants to reduce direct materials usage per unit of II400 in year 2.Manufacturing conversion costs in each year depend on production capacity defined in terms of II400 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.Neither conversion costs or customer-service costs are affected by changes in actual volume.Instruments Inc.has 23 customers in year 1 and 25 customers in year 2.The industry market size for hand held calculators increased 5% from year 1 to year 2.Of the $4 increase in unit selling price,$1 is due to a general increase in prices.
-Required:
a.What is the net effect on operating income as a result of the productivity component?

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Definitions:

Cost Flow Assumption

An accounting method used to value inventory and determine the cost of goods sold, based on the assumed flow of goods.

Moving Average Method

The Moving Average Method is an inventory costing method that calculates the average cost of inventory by taking the average of the costs of goods available for sale.

Inventory Transaction

This term refers to any event that causes a change in the quantity or value of inventory held by a business.

Purchased Units

The quantity of goods acquired by a company for resale or use in production during a specific accounting period.