Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2017 and 2018:
| Units of CM 7 produced and sold | 5,000 | 6,500 |
| Direct materials (pounds) | 16,000 | 16,375 |
| Direct materials costs per pound | $40 | $44 |
| Manufacturing capacity for CM7 (units) | 10,000 | 10,000 |
| Conversion costs | $1,000,000 | $1,100,000 |
| Conversion costs per unit of capacity | $100 | $110 |
| Selling and customer-service capacity (customers) | 60 | 58 |
| Total selling and customer-service costs | $360,000 | $362,500 |
| Selling and customer-service capacity cost per customer | $6,000 | $6,250 |
Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2018. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 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. Somerset Corporation has 100 customers in 2017 and 115 customers in 2018. The industry market size for high-end computer monitors increased 5% from 2017 to 2018.
Required:
| a. | What is operating income for 2017? |
| b. | What is operating income in 2018? |
| c. | What is the change in operating income from 2017 to 2018? |
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