Use the information below to answer the following question(s).Following a strategy of product differentiation, Barry Company makes an XX 300.Barry Company presents the following data for the years 1 and 2. Barry Company produces no defective units but it wants to reduce direct materials usage per unit of XX 300 in year 2.Manufacturing conversion costs in each year depend on production capacity defined in terms of XX 300 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.Barry Company has 23 customers in year 1 and 25 customers in year 2.The industry market size for high-end appliances increased 5% from year 1 to year 2.
-What is the Barry Company's net increase in operating income as a result of the price-recovery component?
A)$101,000 unfavourable
B)$101,000 favourable
C)$6,100 favourable
D)$2,700 unfavourable
E)$6,100 unfavourable

Question

Use the information below to answer the following question(s).Following a strategy of product differentiation, Barry Company makes an XX 300.Barry Company presents the following data for the years 1 and 2.  Barry Company produces no defective units but it wants to reduce direct materials usage per unit of XX 300 in year 2.Manufacturing conversion costs in each year depend on production capacity defined in terms of XX 300 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.Barry Company has 23 customers in year 1 and 25 customers in year 2.The industry market size for high-end appliances increased 5% from year 1 to year 2.
-What is the Barry Company's net increase in operating income as a result of the price-recovery component?
A)$101,000 unfavourable 
B)$101,000 favourable 
C)$6,100 favourable 
D)$2,700 unfavourable 
E)$6,100 unfavourable

Quizplus · Accepted Answer

Based on the information provided, the net increase in operating income due to the price-recovery component can be calculated as the difference between the actual selling price per unit in year 2 and the selling price per unit in year 1, multiplied by the number of units sold in year 2.

The selling price per unit in year 2 is given as $2,000, and in year 1, it was $1,850. Therefore, the increase in selling price per unit is $150.

The number of XX 300 units sold in year 2 is given as 1,000, which is 5% more than the number sold in year 1, 950 units.

Hence, the increase in operating income due to the price-recovery component is:

= ($150 × 1,000) = $150,000.

However, the question is asking for the net increase in operating income, which also takes into account the decrease in direct materials cost per unit. As the direct materials cost per unit decreased by $50, we need to subtract the net decrease in direct materials cost from the increase in operating income due to the price-recovery component.

The net decrease in direct materials cost can be calculated as follows:

= ($50 × 1,000) = $50,000.

Therefore, the net increase in operating income due to the price-recovery component is:

= $150,000 - $50,000 = $100,000

However, the question is specifically asking for the net increase in operating income as a result of the price-recovery component, so we need to take into account all other factors that may affect operating income. Based on the information given, we know that there were no defective units produced and no changes in manufacturing conversion costs. However, we are not provided with any information on changes in customer-service costs or changes in the market share of Barry Company, which may affect operating income. Therefore, we cannot assume that the net increase in operating income due to the price-recovery component is the same as the net increase in overall operating income.

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