Danny Company manufactures an electronic component, ZP98. This component is significantly less expensive than similar products sold by Danny's competitors. Order-processing time is very short; however, approximately 10% of products are defective and returned by the customer. Returns and refunds are handled promptly. Yarmouth Manufacturing, Danny's main competitor, has a higher-priced product with almost no defects but a longer order-processing time.

Assume that in 2016 ,Danny has 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. Cost per kilogram of materials is about the same as before, but conversion costs are higher, and Danny has raised its selling price in line with the market. Sales have increased and returns have decreased. Danny's managers attribute this to higher quality and a price that is still less than Yarmouth's. Information about the current period (2016)and last period (2015) follows in a separate popup. Conversion costs in each year depend on production capacity defined in terms of ZP98 units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Danny can support, not the actual number of customers it serves. Danny has 60 customers in 2015 and 70 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 ZP98 units produced and sold or the number of customers who buy ZP98.

		2015	2016
1a.	Units of ZP98 produced and sold	5,900	7,150
1b.	Units of ZP98 returned	750	550
1c.	Net sales in units	5,150	6,600
2.	Selling price	$53	$59
3.	Direct materials (kilograms) used	3,000	3,650
4.	Direct material cost per kilogram	$11.00	$11.00
5.	Manufacturing capacity in units of ZP98	9,000	9,000
6.	Total conversion costs	$99,000	$162,000
7.	Conversion cost per unit of capacity	$11	$18
8.	Selling and customer-service capacity	70 customers	70 customers
9.	Total selling and customer-service costs	$4,200	$4,380
10.	Selling and customer-service capacity cost per customer	$60.00	$62.57
11.	Advertising staff	3	3
12.	Total advertising costs	$114,000	$127,500
13.	Advertising cost per employee	$38,000	$42,500

Data Table

The company has chosen a cost leadership strategy. The growth, price-recovery, and productivity components of the change in operating income from 2015 to 2016 are as follows:

Revenue effect of growth	$76,850	F
Cost effect of growth	9,295	U
Change in operating income due to growth	$67,555	F

Revenue effect of price-recovery	$39,600	F
Cost effect of price-recovery	76,680	U
Change in operating income due to price-recovery	$37,080	U

Change in operating income due to productivity

$2,145

F

REQUIRED:

Begin by selecting the formula you will use. Then, enter the amounts and calculate the change in operating income due to industry market-size factors. Determine whether the amount has a favourable effect or an unfavourable effect on operating income. (Hold all decimals in interim calculations. Round your final answer to the nearest whole number. Label the compnent as favourable "F" or unfavourable "U".)

						Change in operating income

x (

/

) =

due to industry market size

x (

/

) =

Now calculate the change in operating income due to product differentiation. Label each component as to whether the amount has a favourable effect or an unfavourable effect on operating income. (Label each compnent as favourable "F" or unfavourable "U".)

Change in operating income due to product differentiation

Now determine the change in operating income due to cost leadership. Determine whether the amount has a favourable effect or an unfavourable effect on operating income. (Label each compnent as favourable "F" or unfavourable "U".)

Change in operating income due to cost leadership

How does this relate to Danny 's strategy and its success in implementation? Explain.Danny

has been OR has not been

successful in implementing its cost leadership strategy. The increase in operating income during 2016 was due to ______________________.