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

question 163

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:
$\begin{array}{lrr}&2012&2013\\\text { Units of CM7 produced and sold } & 5,000 & 5,500 \\\text { Selling price } & \$ 400 & \$ 440 \\\text { Direct materials (pounds) } & 15,000 & 15,375 \\\text { Direct materials costs per pound } & \$ 40 & \$ 44 \\\text { Manufacturing capacity for CM7 (units) } & 10,000 & 10,000\\\text { Conversion costs } & \$ 1,000,000 & \$ 1,100,000 \\\text { Conversion costs per unit of capacity } & \$ 100 & \$ 110 \\\text { Selling and customer-service capacity (customers) } & 60 & 58 \\\text { Total selling and customer-service costs } & \$ 360,000 & \$ 362,500 \\\text { Selling and customer-service capacity cost per customer } & \$ 6,000 & \$ 6,250\\\end{array}$ Sting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2013.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 growth component?
b.What 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:

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The first individuals or entities that held the legal rights or titles to property or assets.

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A measure of the efficiency of production, often calculated as the ratio of outputs produced to inputs used in the production process.