Rebecca Farnum Inc. plans to grow by offering a computer monitor, the CM3000 that is superior and unique from the competition. Rebecca Farnum believes that putting additional resources into R&D and staying ahead of the competition with technological innovations are critical to implementing its strategy. Rebecca Farnum Inc. in following its strategy makes the high-end computer monitor, CM3000 and has presented the following data for the years 2018 and 2019: Units of CM3000 produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity for CM3000 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer 2018 2019 5,000 5,500 $400 $440 15,000 15,375 $40 $44 10,000 10,000 $1,000,00 $1,100,000 0 $100 $110 60 58 $360,000 $362,500 $6,000 $6,250 Rebecca Farnum Inc. produces no defective units but it wants to reduce direct materials usage per unit of CM3000 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM3000 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. Rebecca Farnum Inc. has 46 customers in 2018 and 50 customers in 2019. The industry market size for high-end computer monitors increased 5% from 2018 to 2019. Required a) Is Rebecca Farnum Inc. strategy one of product differentiation or cost leadership? Briefly discuss your answer. b) Evaluate the impact on the operating income of the growth, price- recovery and productivity components. a) Rebecca Farnum's strategy is one of product differentiation because the company plans to offer a product that is superior and unique from the competition. Operating income 2018 ($400 5,000) - [($40 15,000) + ($100 10,000) + ($6,000 60)] = $40,000 Operating income 2019 ($440 5,500) - [($44 15,375) + ($110 10,000) + ($6,250 58)] = $281,000 Change in operating income $40,000 - $281,000= $241,000 F Revenue effect of the growth component (5,500 - 5,000) $400 = $200,000 F Cost effect of the growth component 15,000 5,500 / 5,000 = 16,500; [(16,500 - 15,000) $40] = $60,000 U [(10,000 - 10,000) $100] = 0 [(60 - 60) $6,000] = 0 Total cost effect of growth = $60,000 U Net effect on operating income as a result of the growth component $200,000 F + $60,000 U = $140,000 F Revenue effect of the price-recovery component ($440 - $400) 5,500 = $220,000 F Cost effect of the price-recovery component. 15,000 5,500 / 5,000 = 16,500; [($44 - $40) 16,500] = $66,000 U [($110 - $100) 10,000] =$100,000 U [($6,250 - $6,000) 60] = $15,000 U Total cost effect of price recovery = $181,000 U Net effect on operating income as a result of the price-recovery component $220,000 F + $181,000 U = $39,000 F Net effect on operating income as a result of the productivity component 15,000 5,500 / 5,000 = 16,500; [(15,375 - 16,500) $44] =$49,500 F [(10,000 - 10,000) $110] = 0 [(58 - 60) 6,250] = $12,500 F Net effect of productivity component = $62,000 F Change in operating income Net effect on operating income as a result of the growth component = $140,000 F Net effect on operating income as a result of the price-recovery component = $39,000 F Net effect of productivity component = $62,000 F 140,000 + 39,000 + 62,000 = 241,000