Author Question: Following a strategy of product differentiation, Somerset Corporation makes a high-end computer ... (Read 55 times)

nummyann · **on:** Mar 6, 2021

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:

2017

2018

Units of CM7 produced and sold

5,000

5,500

Selling price

$400

$440

Direct materials (pounds)

15,000

15,375

Direct materials costs per pound

$40

$44

Manufacturing capacity for CM12 (units)

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 2017. 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. Ernsting 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 the revenue effect of the price-recovery component?

b.	What is the cost effect of the price-recovery component?

c.	What is the net effect on operating income as a result of the price-recovery component?

d.	What is the net effect on operating income as a result of the productivity component?

wuly · **Reply #1 on:** Mar 6, 2021

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