Question 27

PROBLEM 2 (10 Points). Show all of your work including computations.

Following a strategy of product differentiation, a corporation makes a high-end computer monitor, CM7. The corporation presents the following data for the years 2019 and 2020:

......................................................................................................2019................2020

Units of CM7 produced and sold...............................................10,000.............11,000

Selling price..................................................................................$800................$880

Direct materials (pounds)..........................................................30,000.............30,750

Direct material cost per pound.......................................................$80..................$88

Manufacturing capacity for CM7 (units).....................................10,000.............10,000

Conversion costs................................................................$2,000,000......$2,200,000

Conversion costs per unit of capacity...........................................$200................$220

Selling and customer-service capacity (customers).........................60....................58

Total selling and customer-service costs..............................$720,000.........$725,000

Selling and customer-service capacity cost per customer......$12,000...........$12,500

The corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2020. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 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. The industry market size for high-end computer monitors increased 4% from 2019 to 2020.

Required:

a. What is operating income for 2019?

b. What is operating income for 2020?

c. What is the change in operating income from 2019 to 2020?