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

question 143

Essay

Following a strategy of product differentiation,Sting Corporation makes a high-end computer monitor,CM7.Sting Corporation presents the following data for the years 2012 and 2013:
$\begin{array}{lrr}&2012&2013\\\text { Units of CM7 produced and sold } & 5,000 & 5,500 \\\text { Selling price } & \$ 400 & \$ 440 \\\text { Direct materials (pounds) } & 15,000 & 15,375 \\\text { Direct materials costs per pound } & \$ 40 & \$ 44 \\\text { Manufacturing capacity for CM12 (units) } & 10,000 & 10,000\\\text { Conversion costs } & \$ 1,000,000 & \$ 1,100,000 \\\text { Conversion costs per unit of capacity } & \$ 100 & \$ 110 \\\text { Selling and customer-service capacity (customers) } & 60 & 58 \\\text { Total selling and customer-service costs } & \$ 360,000 & \$ 362,500 \\\text { Selling and customer-service capacity cost per customer } & \$ 6,000 & \$ 6,250\end{array}$ Sting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2012.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 2012 and 115 customers in 2013.The industry market size for high-end computer monitors increased 5% from 2012 to 2013.
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:

Inflation Rate

The percentage increase in the price level of goods and services in an economy over a period of time, indicating how prices are rising on average.

Consumer Price Index

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care, often used to indicate inflation.

Inflation Rate

The percentage rate of increase in the price level of goods and services in an economy over a period of time.

Technological Change

The overall process of invention, innovation, and diffusion of technology or processes.