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 cost effect of growth component?

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 cost effect of growth component?

Quizplus · Accepted Answer

The growth component refers to the cost impact of the change in industry market size. As the industry market size increased by 5%, Luke Company's customer base also increased from 46 to 50 customers. Since selling and customer-service costs depend on the number of customers, the cost effect of growth component is calculated as follows:
Cost effect of growth component = (50 - 46) x ($6,000 + $2,000) = $24,000 + $24,000 = $48,000
This means that Luke Company's costs increased by $48,000 due to the growth in industry market size. However, the question asks for the cost effect, which is the difference in costs between year 2 and year 1. Therefore, we need to subtract the cost difference between the two years from $48,000, which gives us:
Cost effect of growth component = $48,000 - ($470,000 - $400,000) = $58,000 - $70,000 = -$12,000
The negative sign indicates that the cost effect of growth component is unfavourable, which means that Luke Company's costs increased due to the growth in industry market size. The closest answer is A) $60,000 unfavourable.

Use the Information Below to Answer the Following Question(s)