Following a strategy of product differentiation, Positive Charge Ltd. makes high quality electronic components. Positive Charge Ltd. presents the following data for the past two years relating to its AA01 product.

Positive Charge produces no defective units but it wants to reduce direct materials usage per unit in Year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of 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. Neither conversion costs nor customer- service costs are affected by changes in actual volume. Positive Charge has 60 customers in Year 1 and 66 customers in Year 2. The industry market size for the product increased 6% from Year 1 to Year 2. Of the $50 increase in unit selling price, $30 is attributable to a general price increase.

Required:

1) What is the operating income for Year 1?

2) What is the operating income in Year 2?

3) What amount is the revenue effect of the growth component?

4) What amount is the cost effect of the growth component?

5) What is the net effect on operating income as a result of the growth component?

6) What amount is the revenue effect of the price-recovery component?

7) What amount is the cost effect of the price-recovery component?

8) What is the net effect on operating income as a result of the price-recovery component?

9) What is the net effect on operating income as a result of the productivity component?

Year 1 Year 2 Units of AA01 produced and sold Selling price Direct materials (kilograms) Direct materials costs per kilogram Manufacturing capacity for AA01 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer$9,500 4,320 $850 12,360 $64 15,000 $1,350,000 $1,440,000 $96 78 $760,000 $780,000 $10,000 4,000 $800 10,400 $60 15,000 $90 80