Inca Instruments Inc. (III) makes a handheld calculator, the II400. III presents the following data for years 1 and 2:

	Year 1	Year 2
Units of II400 produced and sold	50,000	52,500
Selling price	$40	$44
Direct materials (kilograms)	150,000	153,375
Direct materials costs per kilogram	$4.00	$4.40
Manufacturing capacity for II400 (units)	62,500	62,500
Total manufacturing conversion costs	$500,000	$550,000
Manufacturing conversion costs per unit of capacity	$8.00	$8.80
Selling and customer-service capacity (customers)	30	29
Total selling and customer-service costs	$360,000	$362,500
Cost per customer of selling & customer-service capacity	$12,000	$12,500

Manufacturing conversion costs depend on production capacity defined in terms of the number of II400 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer service functions are designed to support. Neither conversion costs nor customer service costs are affected by changes in actual volume. Inca Instruments has 23 customers (retailers) in Year 1 and 25 customers in Year 2. The industry market size for handheld calculators increased 5% from Year 1 to Year 2. Of the $4 increase in unit selling price, $1 is due to a general increase in prices.

Account	Y1	Y2
Sales	2,000,000	2,530,000
Less: Direct Materials	900,000	985,563
Less: Manufacturing Conversion Costs	400,000	495,000
Less: Selling and conversion Service Cost	207,000	237,500
Operating Income	493,000	811,937

Account	Change
Operating Income	Increase of 318,937
Growth revenue	200,000 Favourable
Growth Cost effect	90,000 Unfavourable
Price-recovery revenue	330,000 Favourable
Price-recovery cost effect	82,500 Unfavourable

Required:

What type of strategy is the company pursuing: cost leadership or value leadership? Support your answer using the variances calculated in #2 (provided) (i.e., explain how the variances may demonstrate that the company is pursuing a particular strategy).