Part B

As a result of the actions taken, quality has significantly improved in 2013 while rework and unit costs of the Maxus have decreased. Scott has reduced manufacturing capacity because capacity is no longer needed to support rework. Scott has also lowered the Maxus's selling price to gain market share and unit sales have increased. Information about the current period (2013) and last period (2012) follows.

20122013

1. Units of Maxus produced and sold8,00011,000

2. Selling price$95$80

3. Direct materials used (kits*)10,00011,000

4. Direct material cost per kit*$32$32

5. Manufacturing capacity in kits processed14,00013,000

6. Total conversion costs$280,000$260,000

7. Conversion cost per unit of capacity (row 6/row5)$20$20

8. Selling and customer-service capacity90 customers90 customers

9. Total selling and customer-service costs$13,500$16,200

10. Selling and customer-service capacity cost$150$180

per customer (row 9/row 8)

*A kit is composed of all the major components needed to produce a DVD player.

Conversion costs in each year depend on production capacity defined in terms of kits that can be processed, not the actual kits started. Selling and customer-service costs depend on the number of customers that Scott can support, not the actual number of customers it serves. Scott has 70 customers in 2012 and 80 customers in 2013.

Required:

1.Calculate operating income of Scott Company for 2012 and 2013.

2.Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2012 to 2013.

3.Comment on your answer in requirement 2. What do these components indicate?

Part C

Suppose that during 2013, the market for DVD players grew 10%. All increases in market share (that is, sales increases greater than 10%) and decreases in the selling price of the Maxus are the result of Scott's strategic actions.

Calculate how much of the change in operating income from 2012 to 2013 is due to the industry-market-size factor, product differentiation, and cost leadership. How does this relate to Scott's strategy and its success in implementation? Explain.

Part D

In reference to Scott's business information for the periods 2013 and 2012, as shown in Part B (above):

1.Calculate the amount and cost of (a) unused manufacturing capacity and (b) unused selling and customer-service capacity at the beginning of 2013 based on actual production and actual number of customers served in 2013.

2.Suppose Scott can add or reduce its selling and customer-service capacity in increments of five customers. What is the maximum amount of costs that Scott could save in 2013 by downsizing selling and customer-service capacity?

3.Scott, in fact, does not eliminate any of its unused selling and customer-service capacity. Why might Scott not downsize?