Question

In: Accounting

Fred McReynolds is the accountant for Y Ltd and conducted the following analysis of the change...

Fred McReynolds is the accountant for Y Ltd and conducted the following analysis of the change in operating income between 2018 and 2019:

Operating income for 2018 $4,450,000

Add growth component 70,000

Add price-recovery component 392,000

Deduct productivity component (55,000)

Operating income for 2019 $4,857,000

Required:

Explain whether Y Ltd’s operating income increase is consistent with the product differentiation or cost leadership strategy?

Expert Solution

Operating Income For 2018	$4450000
Add-Growth Component	$70000	Favourable
Add-Price recovery component	$392000	Favourable
Less-Productivity Component	($55000)	Unfavourable

Operating Income for 2018	$4875000	Overall favourable

1.Product Differentiation – an organization’s ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors Which leads to brand loyalty and the willingness of customers to pay high prices.

2.Cost Leadership – an organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control which leads to lower selling prices.

3.Strategic Analysis of Operating Income – three parts:

#1.Growth Component – measures the change in operating income attributable solely to the change in the quantity of output sold between the current and prior periods.

Revenue effect of growth Component =

(Actual units sold in 2019- Actual units sold in 2018) * Selling price of change in 2018

#2.Price-Recovery Component – measures the change in operating income attributable solely to changes in prices of inputs and outputs between the current and prior periods

Revenue Effects of Price Recovery Component=

(Selling price in 2019-Selling price in 2019)* Actual units Sold in 2019

#3.Productivity Component – measures the change in costs attributable to a change in the quantity of inputs between the current and prior periods.

Revenue effects of Productivity Component=

(Input price in 2019-input price in 2018)*Units of input required to produce 2019 output in 2018

Opinion-The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Companies product differentiation strategy. The company was able to continue to charge a premium price while growing sales.

ekkarill92 answered 2 years ago

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