Question

p) Product Differentiation Strategy

Ratliff Appliances Company makes a household appliance with model number RM16. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of RM16 units that can be produced. The industry market size for appliances increased 10% from 2019 to 2020. The following additional data are available for 2019 and 2020:

	2019	2020
Units Produced & Sold	33,000	37,950
Selling Price	$ 360	$ 345
Direct Materials (square feet)	82,500	87,000
Direct Material Costs per square foot	$ 31	$ 33
Manufacturing capacity (units)	41,250	39,850
Total Conversion Costs	$ 866,250	$ 797,000
Conversion Costs per unit of capacity	$ 21	$ 20

Ignoring the market growth, but considering your answer to question (a), how much of Ratliff Co’s change in income from 2019 to 2020 is due to a product differentiation strategy?

Answer 1

Answer:

change in income due to product differentiation = $10,741.50

The market size has increased 10% but the increase in the units produced and sold has increased 15% which is certainly due to product differentiation.

Explanation:

The change in income due to product differentiation has been calculated below:

percentage change in production and sale = (37950-33000)/33000 = 15%

out of which 10% is due to change in the market size.

therefore change due to product differentiation = 5% of 33000 = 1650 units

income has also changed due to capacity change thus we have not considered that,

sales per unit has also changed 15 per unit.

Computation:

	2019	2020
sales per unit	360	345
material per unit (total / units)	2.5	2.29
Direct cost = material per unit × cost per unit	77.5	75.57
Income	282.5	269.43
Change in income		-13.07
add change due to sales price		15
add change due to DM price		4.58
Net change in income per unit due to product differentiation		6.51

Total change = Change per unit × units

= 6.51 × 1650

= 10,741.50