Information:

Question:

a. How do you determine that this is an unfavourable outcome?

b. How do you determine that this is an unfavourable outcome?

c. How do you determine that this is an unfavourable outcome?

2015 2016 1. Units of LCX1 produced and sold 1,000,000 1,150,000 2. Selling price $27 $25 3. Direct materials (square centimetres of silicon wafers) 3,000,000 2,900,000 4. Direct material cost per square centimetre $1.40 $1.50 3,750,000 3,500,000 5. Manufacturing processing capacity (in square centimetres of silicon wafer) $16,050,000 $15,225,000 6. Conversion costs (all manufacturing costs other than direct material costs) 7. Conversion cost per unit of capacity (Row 6:Row 5) $4.28 $4.35 8. R&D employees 40 39 9. R&D costs $4,000,000 $3,900,000 10. R&D cost per employee (Row 9=Row 8) $100,000 $100,000 2015 2016 $27,000,000 $28,750,000 Revenue ($27 per unit x 1,000,000 units; $25 per unit x 1,150,000 units) Costs Direct material costs ($1.40/sq. cm. x 3,000,000 sq. cm.; $1.50/sq. cm. X 2,900,000 sq. cm.) Conversion costs ($4.28/sq. cm. x 3,750,000 sq. cm.; $4.35/sq. cm. x 3,500,000 sq. cm.) R&D costs ($100,000 x 40 employees; $100,000 X 39 employees) 4,200,000 4,350,000 16,050,000 4,000,000 15,225,000 3,900,000 Total costs 24,250,000 23,475,000 Operating income Change in operating income $ 2,750,000 $ 5,275,000 $2,525,000 F A Revenue Effect of Price Recovery Note that this calculation focuses on the decrease in the price of LCX1 between 2015 and 2016. The objective of the revenue effect of price recovery is to isolate the change in revenue between 2015 and 2016 due solely to the change in selling prices. Revenue effect Actual units of Selling price Selling price of product differentiation = x output sold in 2016 in 2015 component in 2016 = ($25 - $27) X 1,150,000 = $2,300,000 U Cost Effect of Price Recovery This calculation focuses on the effect of changes in the prices of inputs. Because of the anticipated change in manufacturing conversion costs, these fixed costs must be considered to capture the full cost effect of price recovery. The cost of direct materials required to produce 3,450,000 cm has already been considered when calculating the cost effect of growth. Cost effect of price recovery for variable costs = Input price Input price in 2016 in 2015 Units of input required to produce 2016 output in 2015 Cost effect of price recovery for direct materials ($1.50 per sq.cm. $1.40 per sq.cm.) X 3,450,000 sq.cm. $345,000 U The cost effect of price recovery for fixed costs is: Price per Price per Cost effect of price recovery for = fixed costs unit of capacity in 2016 unit of capacity in 2015 Actual units of capacity in 2013, if adequate to produce 2016 output in 2015 OR x If 2015 capacity inadequate to produce 2016 output in 2015, units of capacity required to produce 2016 output in 2015 15 16 The cost effects of price recovery conversion and R&D fixed costs are: Conversion costs = ($4.35 per cm2 $4.28 per cm2) * 3,750,000 cm = $262,500 U R&D costs = ($100,000 per employee $100,000 per employee) 40 employees = $0