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

question 53

Essay

Use the information below to answer the following question(s).
Following a strategy of product differentiation,Ernsting Ltd.makes high quality electronic components.Ernsting Ltd.presents the following data for the past two years relating to its XJ649 product.
Ernsting produces no defective units but it wants to reduce direct materials usage per unit in Year 2 .Manufacturing conversion costs in each year depend on production capacity defined in terms of 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 nor customer-service costs are affected by changes in actual volume.Ernsting has 60 customers in Year 1 and 66 customers in Year 2.The industry market size for the product increased 6% from Year 1 to Year 2.Of the $50 increase in unit selling price,$30 is attributable to a general price increase.
-Required:
a.What amount is the revenue effect of the growth component?
b.What amount is the cost effect of the growth component?
c.What is the net effect on operating income as a result of the growth component?

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Definitions:

Inventory Value

The sum of the market value or total cost of all products and goods that a company has in stock for the purpose of selling.

Blenders

Kitchen appliances used for mixing, pureeing, or emulsifying food and other substances.

LIFO Method

An accounting method that records the last items added to inventory as the first items sold.

Ending Inventory

Refers to the value of goods available for sale at the end of an accounting period.