WALL-E Corporation produces a single product, the EVA-9000. Until recently, the product was viewed to be of

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Question:

WALL-E Corporation produces a single product, the "EVA-9000". Until recently, the product was viewed to be of superior quality to the products of its competitors. However, in the last two years the quality of the competing products has improved and the management of WALL-E feels that the EVA-9000 no longer has a competitive advantage. Management believes that the demand for the market will be stable over the next few years and it wants the EVA-9000 to remain a dominant player in the market segment. Increased competition did cause management to reduce the unit selling price in 2020. Consequently, in 2020, WALL-E focused on becoming a more efficient producer. It looked at all functions in its value chain with a goal to reducing costs. The 2020 financial results are now available, and the management of WALLE is interested to see if their cost-cutting efforts were effective. Relevant financial information is provided in exhibit one.

Revenue and Cost Information

2019 & 2020

2019 2020

Volume of EVA-9000 produced and sold 6,000 5,750

Unit selling price $5,000 $4,750

Direct materials used in production (kilograms) 600,000 475,000

Direct material cost per kilogram $9.50 $9.25

Manufacturing capacity (units of EVA-9000) 7,000 7,000

Total conversion costs $2,250,000 $2,000,000

Selling and customer-service capacity 200 customers 180 customers

Total selling and customer-service costs $1,750,000 $1,600,000

Number of customers 200 175

Design (number of staff) 15 12

Total design costs $950,000 $925,000

Required: 1. Briefly describe the characteristics of both the value leadership and cost leadership strategies. Which strategy do you believe that WALL-E Corporation is following? Explain. (4 marks)

2. Calculate the operating income of WALL-E Corporation for 2019 and 2020. As well, show the change in income between the two years on a line by line basis. (3 marks)

3. Calculate the growth, price-recovery and productivity components that explain the changes in operating income from 2019 to 2020. (10 marks)

4. Suppose that during 2020, the market for the EVA-9000 declined by 5%. All changes in market share are the result of WALL-E's strategic actions. Calculate how much of the change in operating income is due to industry market-size factor, value leadership and cost leadership. Was WALL-E successful in implementing its strategy? Explain (5 marks)