Cost Accounting (14th Edition)

PROBLEM FOR SELF-STUDY 491
In summary, the net increase in operating income attributable to productivity equals the
following:
Income
Statement
Amounts
in 2010
(1)
Cost effect of productivity:
Direct material costs
$33,000 F
Conversion costs 0
Selling and customer-service costs
ƒ25,000 F
Change in operating income due to productivity $58,000 F
A summary of the change in operating income between 2010 and 2011 follows:
Revenue and
Cost Effects
of Growth
Component
in 2011
(2)
Revenue and
Cost Effects of
Price-Recovery
Component
in 2011
(3)
Cost Effect
of Productivity
Component
in 2011
(4)
Income Statement
Amounts in 2011
(5) = (1) + (2) + (3) + (4)
Revenue $4,000,000 $200,000 F $420,000 F — $4,620,000
Costs ƒ2,920,000 ƒƒ60,000 U ƒ256,000 U $58,000 F ƒ3,178,000
Operating
income $1,080,000 $140,000 F $164,000 F $58,000 F $1,442,000
362,000 F
Change in operating income
3. Effect of the Industry-Market-Size Factor on Operating Income
Of the increase in sales from 40,000 to 42,000 units, 3%, or 1,200 units (0.03 *
40,000), is due to growth in market size, and 800 units (2,000 – 1,200) are due to an
increase in market share. The change in Westwood’s operating income from the
industry-market-size factor rather than specific strategic actions is as follows:
$140,000 (column 2 of preceding table) *
1,200 units
2,000 units
$84,000 F
Effect of Product Differentiation on Operating Income
Increase in the selling price of KE8 (revenue effect of the price-recovery component)
Increase in prices of inputs (cost effect of the price-recovery component)
Growth in market share due to product differentiation
800 units
$140,000 (column 2 of preceding table) *
2,000 units
Change in operating income due to product differentiation
$420,000 F
256,000 U
ƒƒ56,000 F
$220,000 F
Effect of Cost Leadership on Operating Income
Productivity component
$ƒ58,000 F
A summary of the net increase in operating income from 2010 to 2011 follows:
Change due to the industry-market-size factor
Change due to product differentiation
Change due to cost leadership
Change in operating income
$ 84,000 F
220,000 F
ƒƒ58,000 F
$362,000 F
4. The analysis of operating income indicates that a significant amount of the increase in
operating income resulted from Westwood’s successful implementation of its productdifferentiation
strategy. The company was able to continue to charge a premium price
for KE8 while increasing market share. Westwood was also able to earn additional
operating income from improving its productivity.