Question 5.3 (Total: 62 marks)

Following a strategy of product differentiation, R2D2 Corporation makes a high-end computer monitor, BB8. R2D2 Corporation presents the following data for the years 1 and 2:

Units of BB8 produced and sold5,0005,500Selling price$400$440Direct materials (kilograms)15,00015,375Direct materials costs per kilogram $40$44Manufacturing capacity for BB8 (units) 10,00010,000Total manufacturing conversion costs$500,000$550,000Manufacturing conversion costs per unit of capacity $50$55Selling and customer-service capacity (customers)6058Total selling and customer-service costs $180,000$181,250Cost per customer of selling & customer-service capacity $3,000$3,125

R2D2 Corporation produces no defective units, but it wants to reduce direct materials usage per unit of BB8 in Year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of BB8 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. Neither conversion costs nor customer-service costs are affected by changes in actual volume. R2D2 Corporation has 46 customers in Year 1 and 50 customers in Year 2. The industry market size for high-end computer monitors increased 5% from Year 1 to Year 2. Of the $40 increase in unit selling price, $10 was attributable to a general increase in prices.

1. What amount is the cost effect of growth component?
2. What is the change in operating income because of the growth component?
3. What amount is the revenue effect of price recovery component?
4. What amount is the cost effect of price recovery component?
5. What is the amount of the productivity component?