Question : 13.4   Evaluate strategic success at implementing a cost leadership strategy : 1186024

13.4   Evaluate strategic success at implementing a cost leadership strategy using balanced scorecard measures.

1) The growth component measures the increase in revenues minus the increase in costs from selling more units of a product.

2) The productivity component measures the reduction in costs attributable to a reduction in the quantity of inputs used in year 2 relative to the quantity of inputs that would have been used in year 1 to produce the year 2 output.

3) To evaluate the success of its strategy, a company can subdivide the change in costs into growth, price-recovery and productivity components.

4) The productivity component of operating income focuses exclusively on revenues.

5) The price-recovery component measures the increase in operating income from selling more units of a product.

6) Companies that have been successful at cost leadership will show large favorable price-recovery and growth components when analyzing profitability.

7) The price-recovery component of a change in operating income from one year to the next measures the increase in operating income from selling more units of the product.

8) The price-recovery component of a change in operating income measures the effect of price changes on revenues and costs.

9) Unused capacity is the amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period.

Use the information below to answer the following question(s).

Following a strategy of product differentiation, Luke Company makes a high-end Appliance, AP15. Luke Company presents the following data for the years 1 and 2.

Year 1

Year 2

Units of AP15 produced and sold

20,000

21,000

Selling price

$200

$220

Direct materials (square metres)

60,000

61,500

Direct materials costs per square metre

  $20

$22

Manufacturing capacity for AP15 (units)

25,000

25,000

Total manufacturing conversion costs

$1,000,000

$1,100,000

Manufacturing conversion costs (per unit of capacity)

$40

$44

Selling and customer- service capacity (customers)

60

58

Total selling and customer-service costs

$360,000

$362,500

Cost per customer of selling and customer-service capacity

$6,000

$6,250

Luke Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 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 or customer-service costs are affected by changes in actual volume. Luke Company has 46 customers in year 1 and 50 customers in year 2. The industry market size for high-end appliances increased 5% from year 1 to year 2.

10) What is the operating income for year 1?

A) $4,000,000

B) $804,500

C) $1,240,000

D) $1,240,500

E) $1,440,000