Analysis of growth, price-recovery, and productivity components (continuation of Exercise 13-16). An analysis of La Flamme’s operating income changes between 2013 and 2014 shows the following:
Operating income for 2014 ............ $1,700,000
Add growth component ........... 70,000
Deduct price-recovery component .......... (60,000)
Add productivity component ........... 140,000
Operating income for 2013 ............$1,850,000
The industry market size for corrugated boxes did not grow in 2014, input prices did not change, and La Flamme reduced the price of its boxes in line with the market.
REQUIRED
1. Was La Flamme’s gain in operating income in 2014 consistent with the strategy you identified in requirement 1 of Exercise 13-16?
2. Explain the productivity component. In general, does it represent savings in only variable costs, only fixed costs, or both variable and fixed costs?