Reference no: EM133030537
Question - Assume that in 2016, Dubbledore Industries changed its processes and trained workers to recognize quality problems and fix them before products are finished and shipped to customers. Quality is now at an acceptable level. The selling price for its key product, RBK10, was increased in 2016 to reflect an increased price for direct materials and additional conversion costs needed to deliver a higher quality product. Sales have increased, even with the increase in price, and returns have decreased. Dubbledores' managers attribute this to higher quality and a price that is still less than their main competitor, Ginko Corporation. Information related to the RBK10 product for the current period and prior period follows:
2015 2016
Units of RBK10 produced and sold 19,000 for 2015 21,500 for 2016
Units returned 1,150 for 2015 550 for 2016
Net sales in units 17,850 For 2015 20,950 For 2016
Selling price $23 For 2015 $26 For 2016
Direct materials (kilograms) used 47,500 For 2015 51,600 For 2016
Direct material cost per kilogram $1.25 For 2015 $1.35 For 2016
Manufacturing capacity in units 23,000 For 2015 23,000 For 2016
Total conversion costs $115,000 For 2015 $149,500 For 2016
Conversion cost per unit of capacity $5 For 2015 $6.5 For 2016
Selling and customer-service capacity 100 customers for 2015 120 customers For 2016
Total selling and customer-service costs $11,000 for 2015 $12,600 for 2016
Total selling and customer-service capacity cost per customer $110 for 2015 $105 for 2016
Advertising staff 4 for 2015 4 for 2016
Total advertising costs $24,000 for 2015 $28,000 for 2016
Advertising cost per employee $6,000 for 2015 $7,000 for 2016
Conversion costs in each year depend on production capacity defined in terms of RBK10 units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Dubbledore can support, not the actual number of customers it serves. Dubbledore has 95 customers in 2015 and 115 customers in 2016. At the start of each year, management uses its discretion to determine the number of advertising staff for the year. Advertising staff and its costs have no direct relationship with the quantity of RBK10 units produced and sold or the number of customers who buy RBK10.
Required -
a) Calculate the operating income of Dubbledore for 2015 and 2016.
b) Calculate the growth (both revenue and cost effect), price-recovery (both revenue and cost effect), and productivity components that explain the change in operating income from 2015 to 2016.
c) What type of strategy is Dubbledore pursuing: cost leadership or value leadership? Support your answer using the variances calculated in question 2 (i.e., explain how the variances may demonstrate the company is pursuing a particular strategy).