Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2017 and 2018:

Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2017. 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 2017 and 115 customers in 2018. The industry market size for high-end computer monitors increased 5% from 2017 to 2018.
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?

Question

Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2017 and 2018:
  
Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2017. 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 2017 and 115 customers in 2018. The industry market size for high-end computer monitors increased 5% from 2017 to 2018.
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?

Quizplus · Accepted Answer

The Answer of Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2017 and 2018:
  
Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2017. 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 2017 and 115 customers in 2018. The industry market size for high-end computer monitors increased 5% from 2017 to 2018.
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?

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