Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2017 and 2018:

Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 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. Izzy's Limited had 160 customers in 2017 and 165 customers in 2018.
What is the net effect on operating income as a result of the price-recovery component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.)
A) $1,292,700 F
B) $1,545,000 U
C) $1,292,700 U
D) $1,545,000 F

Question

Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2017 and 2018:

Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 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. Izzy's Limited had 160 customers in 2017 and 165 customers in 2018.
What is the net effect on operating income as a result of the price-recovery component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.)
A) $1,292,700 F 
B) $1,545,000 U 
C) $1,292,700 U 
D) $1,545,000 F

Quizplus · Accepted Answer

Revenue effect of the price-recovery component = (650 - 600) x 62,500 = $3,125,000 F
Units of input required to produce 2018 output in 2017 = (152,000 / 59,000) x 62,500 = 161,250
Cost effect of price-recovery for direct materials = ($68 - $60) x 161,250 = $1,290,000 U
Cost effect of price-recovery for conversion costs = ($107 - $100) x 62,900 = $440,300 U
Cost effect of price-recovery for selling and customer-service costs =
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Cost effect of the price-recovery component = $1,290,000 U + $440,300 U + $102,000 U = $1,832,300 U
Net effect on operating income as a result of the price-recovery component
= $3,125,000 F + $1,832,300 U = $1,292,700 F

Following a Strategy of Product Differentiation, Izzy's Limited Company Makes