Doon Company manufactures an electronic component, ZP98. This component is significantly less expensive than similar products sold by Doon'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. Yorunt Manufacturing, Doon's main competitor, has a higher-priced product with almost no defects but a longer order-processing time. Assume that in 2019, Doon 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 Doon has raised its selling price in line with the market. Sales have increased and returns have decreased. Doon's managers attribute this to higher quality and a price that is still less than Yorunt's. Information about the current period (2019) and last period (2018) follows. (Click the icon to view the data.) Click the icon to view the additional information.) Required 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 Doon can support, not the actual number of customers it serves. Doon has 65 customers in 2018 and 75 customers in 2019. 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. 2018 2019 1a. Units of ZP98 produced and sold 5,900 7,200 1b. Units of ZP98 returned 550 250 1c. Net sales in units 5,350 6,950 2. Selling price 52 $ 57 3,100 3,725 $ 11.00 $ 11.00 9,000 9,000 $ 90,000 $ 153,000 $ 10 $ 17 3. Direct materials (kilograms) used 4. Direct material cost per kilogram 5. Manufacturing capacity in units of ZP98 6. Total conversion costs 7. Conversion cost per unit of capacity 8. Selling and customer-service capacity 9. Total selling and customer-service costs 10. Selling and customer-service capacity cost per customer 11. Advertising staff 12. Total advertising costs 13. Advertising cost per employee 75 customers 75 customers $ 4,300 $ 4,500 $ 57.33 $ 60.00 2 2 $ 52,000 $ 64,000 26,000 $ 32,000 1. Calculate the change in operating income of Doon Company in 2018 and 2019. 2. Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2018 to 2019. 3. Comment on your answer in requirement 2. What do these components indicate
