cost acct test bank chapter 13 (8)

32) What is the net effect on operating income as a result of the growth component? A) $60,000 U B) $140,000 F C) $60,000 F D) $200,000 F Answer: B

Explanation: B) (21,000 - 20,000) × $200 = $200,000 F [(63,000 - 60,000) × $20] + [(25,000 - 25,000) × $40] + [(60 - 60) × $6,000] = $60,000 U $200,000 F + $60,000 U = $140,000 F Diff: 3

Terms: growth component Objective: 4

AACSB: Analytical skills

33) What is the revenue effect of the price-recovery component? A) $220,000 F B) $420,000 F C) $400,000 F D) $200,000 F Answer: B

Explanation: B) ($220 - $200) × 21,000 = $420,000 F Diff: 2

Terms: price-recovery component Objective: 4

AACSB: Analytical skills

34) What is the cost effect of the price-recovery component? A) $179,000 F B) $179,000 U C) $241,000 U D) $420,000 F Answer: C

Explanation: C) [($22 - $20) × 63,000] + [($44 - $40) × 25,000] + [($6,250 - $6,000) × 60] = $241,000 U Diff: 3

Terms: price-recovery component Objective: 4

AACSB: Analytical skills

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35) What is the net effect on operating income as a result of the price-recovery component? A) $179,000 F B) $179,000 U C) $241,000 U D) $420,000 F Answer: A

Explanation: A) ($220 - $200) × 21,000 = $420,000 F [($22 - $20) × 63,000] + [($44 - $40) × 25,000] + [($6,250 - $6,000) × 60] = $241,000 U $420,000 F + $241,000 U = $179,000 F Diff: 3

Terms: price-recovery component Objective: 4

AACSB: Analytical skills

36) What is the net effect on operating income as a result of the productivity component? A) $179,000 F B) $45,500 F C) $241,000 U D) $420,000 F Answer: B

Explanation: B) [(61,500 - 63,000) × $22] + [(25,000 - 25,000) × $40] + [(58 - 60) × $6,250] = $45,500 F Diff: 3

Terms: productivity component Objective: 4

AACSB: Analytical skills

37) An analysis of Baker, Inc.'s operating income for the last two years showed the following: Operating income for 2011 $1,200,000 Add growth component 30,000 Add price-recovery component 200,000 Deduct productivity component (16,000) Operating income for 2012 $1,414,000 This gain in operating income is consistent with a: A) downsizing strategy B) reengineering strategy

C) product differentiation strategy D) cost leadership strategy Answer: C Diff: 2

Terms: price-recovery component, growth component, productivity component Objective: 4

AACSB: Analytical skills

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Copyright ? 2012 Pearson Education, Inc.

38) An increase of operating income from one year to the next indicates a company's strategy was successful.

Answer: FALSE

Explanation: Operating income could have increased simply because the entire market expanded and have nothing to do with the implementation of a company's strategy. Diff: 3

Terms: Balanced Scorecard Objective: 4

AACSB: Reflective thinking

39) To evaluate the success of its strategy, a company can subdivide the change in operating income into growth, price-recovery, and productivity components. Answer: TRUE Diff: 2

Terms: growth component, price-recovery component, productivity component Objective: 4

AACSB: Reflective thinking

40) The productivity component of operating income focuses exclusively on revenues. Answer: FALSE

Explanation: The productivity component of operating income focuses exclusively on costs. Diff: 2

Terms: productivity component Objective: 4

AACSB: Reflective thinking

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

Answer: FALSE

Explanation: The growth component measures the increase in operating income from selling more units of a product. Diff: 1

Terms: price-recovery component Objective: 4

AACSB: Reflective thinking

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

Explanation: Companies that have successfully differentiated their products will show large favorable price-recovery and growth components when analyzing profitability. Diff: 3

Terms: cost leadership, price-recovery component, growth component Objective: 4

AACSB: Reflective thinking

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43) 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. Answer: FALSE

Explanation: The growth 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. Diff: 2

Terms: price-recovery component Objective: 4

AACSB: Reflective thinking

44) The growth component of a change in operating income measures the effect of price changes on revenues and costs. Answer: FALSE

Explanation: The price-recovery component of a change in operating income measures the effect of price changes on revenues and costs. Diff: 2

Terms: price-recovery component Objective: 4

AACSB: Reflective thinking

45) An analysis of Rodney Corporation's operating income changes between 2011 and 2012 show the following:

Operating income for 2011 $2,000,000 Add growth component 100,000 Deduct price-recovery component (60,000) Add productivity component 240,000 Operating income for 2012 $2,280,000

Required: Is Rodney's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly.

Answer: Rodney's operating income gain is consistent with the cost leadership strategy because the

increase in operating income was driven by the $240,000 gain in productivity. It appears that Rodney took advantage of its productivity gain to reduce prices and to fuel growth. Diff: 2

Terms: cost leadership, product differentiation Objective: 1, 4

AACSB: Analytical skills

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Copyright ? 2012 Pearson Education, Inc.

46) An analysis of Captain Jack Corporation's operating income changes between 2011 and 2012 show the following:

Operating income for 2011 $2,000,000 Add growth component 60,000 Add price-recovery component 400,000 Deduct productivity component (20,000) Operating income for 2012 $2,440,000

Required: Is Captain Jack's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly.

Answer: Captain Jack's operating income gain is consistent with the product differentiation strategy because the increase in operating income was driven by the $400,000 gain in the price-recovery

component. It appears that Jack's superior quality stimulated slight growth and allowed it to charge a price premium for its products. Diff: 2

Terms: cost leadership, product differentiation Objective: 1, 4

AACSB: Reflective thinking

47) Following a strategy of product differentiation, Sting Corporation makes a high-end computer monitor, CM7. Sting Corporation presents the following data for the years 2012 and 2013: 2012 2013 Units of CM 7 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 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

Sting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2013. 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. Sting Corporation has 100 customers in 2012 and 115 customers in 2013. The industry market size for high-end computer monitors increased 5% from 2012 to 2013.

Required:

a. What is operating income for 2012? b. What is operating income in 2013?

c. What is the change in operating income from 2012 to 2013?

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