R and R Industries (RR) manufactures the 'KinuRest' mattress from a special covering called Kinutex-infused fabric. The fabric is proven to promote a restful night's sleep and increased comfort. Additionally, the Kinutex-infused fabric generates kinetic infrared heat to provide a warm sleep.

R and R patented this process with the 'Baby Boomer' generation in mind. This is the demographic of the population between the ages of 57 and 75. They are the market that is most likely to place an emphasis on purchasing a mattress with comfort plus warmth. They are also the market that is most willing to pay the high sales price of this product. As a result, RR's sales have been increasing at a steady rate.

The mattresses are sold in retail outlets across the country that specialize in mattress and bedding products. While loyal, long-time customers can get a special price discount, the KinuRest mattress never goes on sale.

In the past year, RR's research and development team has been partnering with ABC Textiles (ABC), its supplier of Kinutex-infused fabric. ABC changed its manufacturing process to improve the rate that kinetic energy transfers to infrared heat. RR and ABC shared in the additional cost per metre of fabric resulting from the upgrade. This also resulted in the need to use more packing material per mattress.

During the year, RR was able to streamline its operations. As such, it was able to remove a strapping machine from its manufacturing process which reduced overhead costs.

Required

a.State R and R Industries' strategy. Identify three points from the case that give evidence that supports your choice and explain why they support your choice. (3 marks)

b.Return on investment is a financial measure that can be used to assess the financial success of an investment centre. Explain 1 advantage and 1 disadvantage of using return on investment when assessing the success of R and R Industries' operations. Your answer should be specific to R and R's situation. (4 marks)

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QUESTION 2 - (continued)

c.Two of the Balanced Scorecard perspectives are listed in the first column of the table below. For each perspective, fill in the following:

A measure that is specific to the R and R's strategy identified in part (a) (1 mark)

Why is this measure important to R and R? Your explanation must relate specifically to R and R. (2 marks)

Perspective

Identify a measure specific to R and R Industries

Why is this measure important to R and R industries?

Customer

Learning and Growth

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QUESTION 2 - (continued)

d.The following strategic analysis of operating income was taken from R and R's last two years of operations. (6 marks)

Growth

Price Recovery

Product-ivity

2019

2020

Revenue

$1,520,000

$570,000

F

$330,000

F

$0

$2,420,000

Costs

Direct materials

640,000

240,000

U

220,000

U

58,000

U

1,158,000

Conversion costs

560,000

0

0

40,000

F

520,000

Selling/cust.service

capacity costs

27,000

0

0

0

27,000

Total costs

$1,227,000

$240,000

U

$220,000

U

$18,000

U

$1,705,000

Operating income

$293,000

$330,000

F

$110,000

F

$18,000

U

$715,000

Using information from the case and data from the strategic analysis, answer the following:

Growth

Price Recovery

Productivity

Based on the case, explain what likely caused the change in total revenue.

(Not applicable as productivity only focuses on costs)

Based on the case, explain what likely caused the change in total direct materials cost

Based on the case, explain what likely caused the change in conversion cost

(No change in costs here)

(No change in costs here)