Reference no: EM133008440
Question - Artie's Appliances Ltd. (AA) makes waffle irons which are distributed through appliance wholesalers who sell to major retailers throughout Canada. The waffle irons are a popular brand because they are a reliable, low cost purchase. AA presents the following data for the 2019 and 2020.
Units of waffle irons produced and sold
2019 - 200,000
2020- 210,000
Selling price
2019- $16.00
2020-$15.50
Direct materials (kilograms)
2019-100,000
2020-100,800
Direct materials costs per kilogram
2019-$8.00
2020-$7.50
Manufacturing capacity in waffle irons
2019-220,000
2020-220,000
Total manufacturing conversion costs
2019-$1,100,000
2020-$1,003,200
Manufacturing conversion costs (per unit of capacity)
2019- $5.00
2020-$4.56
Selling and customer- service capacity (customers)
2019- 60
2020- 58
Total selling and customer-service costs
2019-$360,000
2020-$362,500
Cost per customer of selling and customer-service capacity
2019-$6,000
2020-$6,250
AA produces no defective units but it wanted to reduce direct materials usage per waffle iron in 2020. Manufacturing conversion costs in each year depend on production capacity defined in terms of waffle irons 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 nor customer-service costs are affected by changes in actual volume. AA had 46 customers in 2019 and 50 customers in year 2020. The industry market size for small appliances increased 5% from 2019 to year 2020.
A. Calculate the change in operating income as a result of the growth component.
B. Calculate the net increase in operating income as a result of the price-recovery component?
C. Calculate the productivity component of change in operating income.
D. Prove that the sum of the figures calculated in questions 4 to 6 are equal to the change in operating income calculated in part 3.