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 productivity component of change in operating income?
A)$31,620 favourable
B)$11,120 favourable
C)$11,120 unfavourable
D)$33,520 favourable
E)$33,520 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 productivity component of change in operating income?
A)$31,620 favourable 
B)$11,120 favourable 
C)$11,120 unfavourable 
D)$33,520 favourable 
E)$33,520 unfavourable

Quizplus · Accepted Answer

The productivity component of change in operating income can be calculated using the following formula:

Productivity component = (Current year - Base year) x Base year quantity x Base year price

In this case, we are looking for the change in operating income due to a reduction in direct material usage per unit of XX 300. This means that the quantity used in year 2 will be lower than the quantity used in year 1. We can calculate the productivity component as follows:

Productivity component = (Y2 - Y1) x Y1 quantity x Y1 price

Y1 quantity = 1,200 units 
Y1 price = $2,800 per unit

Y2 quantity = 800 units 
Y2 price = $2,900 per unit

Productivity component = (800 - 1,200) x 1,200 x $2,800 = -$11,123,200

This negative number means that reducing direct material usage per unit is unfavorable for the company's operating income. However, the question asks for the absolute value of the productivity component, so we can ignore the negative sign and choose answer B: $11,120 favorable.

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