Units of capacity required to produce 2009 output in

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units of capacity required toproduce 2009 output in 2008Direct materials costs($8.50$10)249,192 =$373,788 FAdministrative costs($310$300)4,000 =40,000 UDesign costs($55,000$50,000)5 =25,000UTotal cost effect of price-recovery component$308,788FIn summary, the net increase in operating income as a result of the price-recovery componentequals:Revenue effect of price-recovery$246,700 FCost effect of price-recovery308,788FChange in operating income due to price-recovery$555,488F
13-9TheTheTheProductivityProductivityProductivityComponentComponentComponent=Cost effect ofproductivity forvariable costsActual units ofUnits of inputinput usedrequired toto produceproduce 20092009 outputouput in 2008Inputpricein 2009=Cost effect ofproductivity forfixed costsActual units of capacity in2008, if adequate to produce2009 output in 2008Actual units ofORcapacity inIf 2008 capacity inadequate2009to produce 2009 output in 2008,units of capacity required toproduce 2009 output in 2008Price perunit ofcapacityin 2009The productivity component of cost changes areDirect materials costs(250,000249,192)$8.50= $ 6,868 UAdministrative costs(4,0003,750)$310=77,500 FDesign costs(55)$55,000=0Change in operating income due to productivity$70,632FThe change in operating income between 2008 and 2009 can be analyzed as follows:$1,351,700 FChange in operating income3.The analysis of operating income indicates that growth, price-recovery, and productivityall resulted in favorable changes in operating income in 2009. Further, a significant amount ofthe increase in operating income resulted from Oceano’s product differentiation strategy. Thecompany was able to continue to charge a premium price while growing sales. It was also able toearn additional operating income by improving its productivity.IncomeIncomeIncomeStatementStatementStatementAmountsAmountsAmountsininin200820082008(1)(1)(1)RevenueRevenueRevenueandandandCostCostCostEffectsEffectsEffectsofofofGrowthGrowthGrowthininin200920092009(2)(2)(2)RevenueRevenueRevenueandandandCostCostCostEffectsEffectsEffectsofofofPrice-RecoveryPrice-RecoveryPrice-Recoveryininin200920092009(3)(3)(3)CostCostCostEffectEffectEffectofofofProductivityProductivityProductivityininin200920092009(4)(4)(4)IncomeIncomeIncomeStatementStatementStatementAmountsAmountsAmountsininin200920092009(5)(5)(5)=(1)(1)(1)+(2)(2)(2)+(3)(3)(3)+(4)(4)(4)Revenues$4,950,000$1,217,500 F$246,700 F$6,414,200Costs3,450,000491,920U308,788F$70,632F3,562,500Operating income$1,500,000$725,580 F$555,488F$70,632F$2,851,700
13-1013-2013-2013-20(20 min.)AnalysisAnalysisAnalysisofofofgrowth,growth,growth,price-recovery,price-recovery,price-recovery,andandandproductivityproductivityproductivitycomponentscomponentscomponents(continuation(continuation(continuationofofof13-19).13-19).13-19).Effect of the industry-market-size factor on operating incomeOf the 48,700-unit (246,700 – 198,000) increase in sales between 2008 and 2009, 19,800(10%198,000) units are due to growth in market size, and 28,900 units are due to an increasein market share.The change in Oceano’s operating income from the industry-market size factor rather than fromspecific strategic actions is:$725,580 (the growth component in Exercise 13-19)$295,000F700,48800,19Effect of product differentiation on operating incomeThe change in operating income due to:Increase in the selling price (revenue effect of price recovery)$246,700 FIncrease in price of inputs (cost effect of price recovery)308,788 FGrowth in market share due to product differentiation$725,580 (the growth component in Exercise 13-19)430,580F700,48900,28Change in operating income due to product differentiation$986,068FEffect of cost leadership on operating income

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