Question 5.3 (Total: 62 marks)

Following a strategy of product differentiation, R2D2 Corporation makes a high-end computer monitor, BB8. R2D2 Corporation presents the following data for the years 1 and 2:

Units of BB8 produced and sold	5,000	5,500
Selling price	$400	$440
Direct materials (kilograms)	15,000	15,375
Direct materials costs per kilogram	$40	$44
Manufacturing capacity for BB8 (units)	10,000	10,000
Total manufacturing conversion costs	$500,000	$550,000
Manufacturing conversion costs per unit of capacity	$50	$55
Selling and customer-service capacity (customers)	60	58
Total selling and customer-service costs	$180,000	$181,250
Cost per customer of selling & customer-service capacity	$3,000	$3,125

R2D2 Corporation produces no defective units but it wants to reduce direct materials usage per unit of BB8 in Year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of BB8 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. R2D2 Corporation has 46 customers in Year 1 and 50 customers in Year 2 . The industry market size for high-end computer monitors increased 5% from Year 1 to Year 2. Of the $40 increase in unit selling price, $10 was attributable to a general increase in prices.

Required

1. What is the operating income for Year 1?
2. What is the operating income in Year 2?
3. What is the change in operating income from Year 1 to Year 2?
4. What amount is the revenue effect of growth component?
5. What amount is the cost effect of growth component?
6. What is the change in operating income as a result of the growth component?
7. What amount is the revenue effect of price recovery component?
8. What amount is the cost effect of price recovery component?
9. What is the change in income as a result of the price recovery component?
10. What is the amount of the productivity component?
11. The change in operating income from cost leadership.
12. The change in operating income due to industry wide effects.
13. The effect of product differentiation on operating income and a summarization of the change in operating income between Year 1 and Year 2.