1. What is the operating income for 2020?

2. What is the operating income for 2021?

3. Calculate the revenue effect of the growth component.

4. Calculate the cost effect of the growth component.

5. What is the net effect on net operating income of the growth component?

6. Calculate the revenue effect of the price-recovery component.

7. Calculate the cost effect of the price-recovery component.

8. What is the net effect on net operating income of the price-recovery component?

9. Calculate the cost effect of the productivity component.

10. How would you evaluate the success of ABC Company’s strategy implementation? Explain your position thoroughly using any relevant data from Q1 – Q9.

 

Use the following information for questions 1 10: Following a strategy of cost leadership, ABC Company makes a common household item known as the VE8. ABC Company presents the following data for the years 2020 and 2021: 2020 2021 Units of VE8 produced and sold Selling price per unit Direct materials (pounds) Direct materials cost per pound Manufacturing capacity in units of VE8 29,000 $41 155,150 $2 35,000 33,700 $37 175,240 $2.50 35,000 $700,000 $560,000 $20 2,600 Total conversion costs $16 2,000 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 $130,000 $104,000 $50 $52 Although the ABC Company is not producing defective products, it wants to reduce its usage of direct materials per unit of the VE8. Manufacturing conversion costs in each year depend on production capacity defined in terms of VE8 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. ABC Company had 1,900 customers in 2020 and 1,750 customers in 2021.