Dransfield Company manufactures an electronic component, ZP98. This component is significantly less expensive than similar products sold
Question:
Dransfield Company manufactures an electronic component, ZP98. This component is significantly less expensive than similar products sold by Dransfield's competitors. Order-processing time is very short; however, approximately 10% of products are defective and returned by the customer. Returns and refunds are handled promptly. Yorunt Manufacturing, Dransfield's main competitor, has a higher-priced product with almost no defects but a longer order-processing time. Assume that in 2019, Dransfield has changed its processes and trained workers to recognize quality problems and fix them before products are finished and shipped to customers. Quality is now at an acceptable level. Cost per kilogram of materials is about the same as before, but conversion costs are higher, and Dransfield has raised its selling price in line with the market. Sales have increased and returns have decreased. Oransfield's managers attribute this to higher quality and a price that is still less than Yorunt's. Information about the current period (2019) and last period (2018) follows.
Conversion costs in each year depend on production capacity defined in terms of ZP98 units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Oransfield can support, not the actual number of customers it serves. Oransfield has 50 customers in 2018 and 60 customers in 2019. At the start of each year, management uses its discretion to determine the number of advertising staff for the year. Advertising staff and its costs have no direct relationship with the quantity of ZP98 units produced and sold or the number of customers who buy ZP98.
Required
1. Calculate the change in operating income of Dransfield Company for 2018 and 2019.
2. Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2018 to 2019.
3. Comment on your answer in requirement 2. What do these components indicate?
Step by Step Answer:
Horngrens Cost Accounting A Managerial Emphasis
ISBN: 978-0134453736
8th Canadian Edition
Authors: Srikant M. Datar, Madhav V. Rajan, Louis Beaubien