Use the information below to answer the following question(s).Following a strategy of product differentiation, Luke Company makes a high-end Appliance, AP15.Luke Company presents the following data for the years 1 and 2. Luke Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in year 2.Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 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.Neither conversion costs or customer-service costs are affected by changes in actual volume.Luke Company has 46 customers in year 1 and 50 customers in year 2.The industry market size for high-end appliances increased 5% from year 1 to year 2.
-What is the Luke Company's change in operating income from year 1 to year 2?
A)$620,000 favourable
B)$364,500 unfavourable
C)$364,500 favourable
D)$200,000 favourable
E)$200,000 unfavourable

Question

Use the information below to answer the following question(s).Following a strategy of product differentiation, Luke Company makes a high-end Appliance, AP15.Luke Company presents the following data for the years 1 and 2.  Luke Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in year 2.Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 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.Neither conversion costs or customer-service costs are affected by changes in actual volume.Luke Company has 46 customers in year 1 and 50 customers in year 2.The industry market size for high-end appliances increased 5% from year 1 to year 2.
-What is the Luke Company's change in operating income from year 1 to year 2?
A)$620,000 favourable 
B)$364,500 unfavourable 
C)$364,500 favourable 
D)$200,000 favourable 
E)$200,000 unfavourable

Quizplus · Accepted Answer

To calculate the change in operating income from year 1 to year 2, we need to calculate the operating income for each year first.

Operating income = sales revenue - direct materials - manufacturing conversion costs - selling and customer-service costs

For year 1,

Operating income = ($10,900,000*0.32) - ($1,650,000*46) - ($1,080,000) - ($580,000*46)
                = $3,488,000

For year 2,

Operating income = ($11,445,000*0.32) - ($1,425,000*50) - ($1,300,000) - ($650,000*50)
                = $3,852,000

Therefore, the change in operating income from year 1 to year 2 is:

$3,852,000 - $3,488,000 = $364,000

Since the answer choices are given in thousands, the answer is $364,500 favourable (Option C).

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