Kelton Company sells women's clothing. Kelton's strategy is to offer a wide selection of clothes and excellent customer service and to charge a premium price. Kelton presents the following data for 2011 and 2012. For simplicity, assume that each customer purchases one piece of clothing.

Total selling and customer-service costs depend on the number of customers that Kelton has created capacity to support, not the actual number of customers that Kelton serves. Total purchasing and administrative costs depend on purchasing and administrative capacity that Kelton has created (defined in terms of the number of distinct clothing designs that Kelton can purchase and administer). Purchasing and administrative costs do not depend on the actual number of distinct clothing designs purchased. Kelton purchased 710 distinct designs in 2011 and 580 distinct designs in 2012.
At the start of 2011, Kelton planned to increase operating income by 10% over operating income in 2012.
Required
1. Is Kelton's strategy one of product differentiation or cost leadership? Explain.
2. Calculate Kelton's operating income in 2011 and 2012.
3. Calculate the growth, price-recovery, and productivity components of changes in operating income between 2011 and 2012.
4. Does the strategic analysis of operating income indicate Kelton was successful in implementing its strategy in 2012? Explain.

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2011 2012 50,000 1. Pieces of clothing purchased and sold 50,000 $32 $31.50 2. Average selling price $15 $16.50 3. Average cost per piece of clothing 4. Selling and customer-service capacity 5. Selling and customer-service costs 52,000 customers 62,000 customers $403,000 $291,200 Selling and customer-service capacity cost per customer (row 5 + row 4) $6.50 per customer $5.60 per customer 6. 7. Purchasing and administrative capacity 620 designs 780 designs $62,400 8. Purchasing and administrative costs $40,300 $65 per design $80 per design 9. Purchasing and administrative capacity cost per distinct design (row 8 ÷ row 7)