Cobalt Company Makes a Household Appliance with Model Number X500

question 157

Multiple Choice

Cobalt Company makes a household appliance with model number X500.The goal for 2015 is to improve product design and outlook.No defective units are currently produced.Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced.The industry market size for appliances increased 10% from 2014 to 2015.The following additional data are available for 2014 and 2015: $\begin{array}{lrr}&2014&2015\\\text { Units of } X 500 \text { produced and sold } & 20,000 & 20,000 \\\text { Selling price } & \$ 150 & \$ 170 \\\text { Direct materials (square feet) } & 30,000 & 32,500 \\\text { Direct material costs per square foot } & \$ 10 & \$ 10\\\text { Manufacturing capacity for } X 500 \text { (units) } & 20,500 & 20,500 \\\text { Total conversion costs } & \$ 451,000 & \$ 493,250 \\\text { Conversion costs per unit of capacity } & \$ 22 & \$ 22.5\end{array}$ Out of the two basic strategies,Cobalt's strategy is ________.

• A) product differentiation because Cobalt is able to produce a given quantity of output with a lower cost of inputs
• B) cost leadership because Cobalt is able to produce a given quantity of output with a lower cost of inputs
• C) cost leadership because Cobalt is able to increase its output price faster than the increase in its input prices
• D) product differentiation because Cobalt is able to increase its output price faster than the increase in its input prices

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Definitions:

Equilibrium Price

The cost at which the amount of a product or service that consumers want to buy matches the amount that producers are willing to sell, creating a balanced market situation.

Demand

The quantity of a product or service that consumers are willing and able to purchase at various price levels, at a given point in time.

Supply

The total amount of a good or service available for purchase at any given price.

Surplus

The situation where the quantity of a good or service supplied exceeds the quantity demanded, often causing downward pressure on price.