Following a strategy of product differentiation Arseniq Comp

Following a strategy of product differentiation, Arseniq Company makes a high-end Appliance, XT15. Arseniq presents the following data for the years 2016 and 2017:

                                                                                                     2016                 2017

      Units of XT15 produced and sold                                            50,000               52,500

      Selling price                                                                             $500                 $550

      Direct materials (square feet)                                                150,000             153,750

      Direct materials costs per square foot                                          $50                   $55

      Manufacturing capacity in units of XT15                                 62,500               62,500

      Total conversion costs                                                       $6,250,000         $6,875,000

      Conversion costs per unit of capacity                                         $100                 $110

      Selling and customer-service capacity (customers)                        150                   150

      Total selling and customer-service costs                            $2,250,000         $2,343,750

      Selling and customer-service capacity cost per customer         $15,000             $15,625

Arseniq produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 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. Arseniq had 140 customers in 2016 and 145 customers in 2017.

Income

Statement

Amounts

in 2016

Revenue and

Cost Effects

of Growth

Component

in 2017

Revenue and

Cost Effects of

Price-Recovery

Component

in 2017

Cost Effect of

Productivity

Component

in 2017

Income

Statement

Amounts

in 2017

Revenues ($)

Direct Materials (Variable)

Conversion costs (Fixed)

Selling and customer service costs (Fixed)

Operating income

	Income Statement Amounts in 2016	Revenue and Cost Effects of Growth Component in 2017	Revenue and Cost Effects of Price-Recovery Component in 2017	Cost Effect of Productivity Component in 2017	Income Statement Amounts in 2017
Revenues ($)
Direct Materials (Variable)
Conversion costs (Fixed)
Selling and customer service costs (Fixed)
Operating income

Solution

Combine Income Statement Particular 2016 Calculation 2017 Calculation Revenue $25,000,000 50000*500 $28,875,000 52500*550 Direct Matrial $7,500,000 150000*50 $8,456,250 153750*55 Conversion Cost $5,000,000 50000*100 $5,250,000 52500*100 Selling & Customer Service Cost $2,100,000 15000*140 $2,175,000 15000*145 Operating Income $10,400,000 $12,993,750 Particular 2016 2017 Revenue Direct Material 30% 29% Conversion Cost 20% 18% Selling & Custom 8% 8%