Question

Fong Technology Ltd. (Fong) manufactures high-quality camera drones. Their high-quality product image and innovations in product features are known to the market. The following are the data of Fong’s business for 2018 and 2019:

	2018	2019
Units of phone produced and sold	8,000	8,800
Unit selling price	$1,250	$1,325
Direct materials	2,400 kg	2,460 kg
Direct material cost per kg	$1,200	$1,360
Manufacturing capacity in unit of phone	100,000 units	100,000 units
Conversion costs	$5,000,000	$5,500,000
Conversion cost per unit of capacity	$50	$55

Conversion costs in each year depend on production capacity defined in terms of the number of drones that can be produced, not the actual units produced.

Required

(a) Is Fong’s strategy one of cost leadership or product differentiation? Explain briefly.

(b) Calculate Fong’s operating income for the years 2018 and 2019

(c) Calculate the growth, price-recovery, and productivity components and, using these information, prepare a reconciliation statement to explain the change in operating income from 2018 to 2019. (Indicate favourable change with ‘F’ and unfavourable change with ‘U’)

Answer 1

a). Fong's strategy is product differentiation. This is because it is given that Fong's high product quality image and innovations in product features are well known in the market. This implies that Fong is trying to create a uniqueness in their products to differentiate themselves from the competitors.

b and c). Please see the images below