Reference no: EM132774940

Question - Following a strategy of cost leadership, Mancini Corporation makes GB-11 corn-harvesting vehicle that targets corn farmers in developing countries. Mancini Corporation believes that keeping tight control on costs and maximizing utilization of production capacity are critical to implementing its strategy. Mancini Corporation presents the following data for the years 2010 and 2011:

2011 and 2010 Respectively

Units of GB -11 produced and sold 5,000; 5,500

Selling price 400; 440

Direct materials (pounds) 15,000; 15,375

Direct amterials cost per pound 40; 44

Manufacturing capacity for GB-11 (units) 10,000; 10,000

Conversion costs 1,000,000; 1,100,000

Conversion costs per unit of capacity 100; 110

Selling and customer service capacity (customers) 60; 58

Total selling and customer service costs 360,000; 362,500

Selling and customer service capacity cost per customer 6,000; 6250

Mancini corporation produces no defective units but it wants to reduce direct materials usage per unit of GB-11 in 2011. Manufacturing conversion costs in each year depend on production capacity defined in terms of GB-11 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. Mancini corporation has 100 customers in 2010 and 115 customers in 2011. The industry market size for corn harvesting vehicle in developing countries increased 5% from 2010 to 2011.

Required -

a. What is operating income for 2010 and 2011?

b. What is the change in operating income from 2010 to 2011?

c. What is the revenue effect of the growth component?

d. What us the cost effect of the growth component? (Hint: this is the sum of the cost effect growth for variable costs, fixed conversioan costs and fixed selling and customer service costs)

e. What is the net effect on operating income as a result of the growth component?

f. What is the cost effect of productivity for variable cost?

g. What is the cost effect of productivity for fixed conversion costs?

h. What is the cost effect of productivity for fixed selling and customer service costs?

i. What is the net effect on operating income as a result of the productivity component?

j. Is machini's operating income gain consistent with the cost leadership strategy? Explain briefly.