13-20 The Productivity Component Cost effect ofproductivity forvariable costs= Actual units ofUnits of inputinput used to producerequired to produce2006 output2006 output in 2005Inputprice in2006Cost effect ofproductivity forfixed costs= Actual units of capacity in2005, if adequate to produce2006 output in 2005Actual units ofORcapacity inIf 2005 capacity inadequate2006to produce 2006 output in 2005,units of capacity required toproduce 2006 output in 2005Price perunit ofcapacityin 2006The productivity component of cost changes are: Software implementation labor costs (32,000 –35,000) $63 = $189,000 F Software implementation support costs (90 –90) $4,100 = 0 Software development costs (3 –3) $130,000 = 0Change in operating income due to productivity $189,000F The change in operating income between 2005 and 2006 can be analyzed as follows: Income Statement Amounts in 2005 (1) Revenue and Cost Effects of Growth Component in 2006 (2) Revenue and Cost Effects of Price-Recovery Component in 2006 (3) Cost Effect of Productivity Component in 2006 (4) Income Statement Amounts in 2006 (5) = (1) + (2) + (3) + (4) Revenues $3,000,000 $500,000 F $140,000 U $3,360,000 Costs 2,535,000300,000U 129,000U $189,000F 2,775,000Operating income $ 465,000$200,000 F $269,000U $189,000F $ 585,000$120,000 F Change in operating income 3. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Snyder’s productivity improvements in 2006. The company had to reduce selling prices while labor costs were increasing but it was able to increase operating income by improving its productivity. The productivity gains also allowed Snyder to be competitive and grow the business. The unfavorable price recovery component indicates that Snyder could not pass on increases in labor-related wages via price increases to its customers, very likely because its product was not differentiated from competitors’ offerings.