Author Question: Analysis of growth, price-recovery, and productivity components An analysis of Ridgecrest's ... (Read 178 times)

Mr3Hunna · **on:** Jul 6, 2018

Analysis of growth, price-recovery, and productivity components

An analysis of Ridgecrest's operating-income changes between 2012 and 2013 shows the following:

The industry market size for electric motors did not grow in 2013, input prices did not change, and Ridgecrest reduced the prices of its motors.

Required:
1. Was Ridgecrest's gain in operating income in 2013 consistent with the strategy you identified in requirement 1 of Exercise 12-16?
2. Explain the productivity component. In general, does it represent savings in only variable costs, only fixed costs, or both variable and fixed costs?

Question 2

If equipment costing 930 is bought by paying 300 as a down payment and the remaining 630 in 30 days, owner's equity is increased by 930.
Indicate whether the statement is true or false

parshano · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Ridgecrest's operating income gain is consistent with the cost leadership strategy identified in requirement 1 of Exercise 12-16. The increase in operating income in 2013 was driven by the 160,000 gain in productivity in 2013. Ridgecrest took advantage of its productivity gain to reduce the prices of its motors and to fuel growth. It increased market share by growing even though the total market size was unchanged.

2. The productivity component measures the change in costs attributable to a change in the quantity and mix of inputs used in a year relative to the quantity and mix of inputs that would have been used in a previous year to produce the current year output. It measures the amount by which operating income increases and costs decrease through the productive use of input quantities. When comparing productivities across years, the productivity calculations use current year input prices in all calculations. Hence, the productivity component is unaffected by input price changes.
The productivity component represents savings in both variable costs and fixed costs. With respect to variable costs, such as direct materials, productivity improvements immediately translate into cost savings. In the case of fixed costs, such as fixed manufacturing conversion costs, productivity gains result only if management takes actions to reduce unused capacity. For example, reengineering manufacturing processes will decrease the capacity needed to produce a given level of output, but it will lead to a productivity gain only if management reduces the unused capacity by, say, selling off the excess capacity.

Answer to Question 2

F