Question

Meale Company makes a household appliance with model number X500. The goal for 2012 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 X500 units that can be produced. The industry market size for appliances increased 10% from 2011 to 2012. The following additional data are available for 2011 and 2012: 2011 2012 Units of X500 produced and sold 10,000 11,000 Selling price $100 $95 Direct materials (square feet) 30,000 29,000 Direct material costs per square foot $10 $11 Manufacturing capacity for X500 (units) 12,500 12,000 Total conversion costs $250,000 $240,000 Conversion costs per unit of capacity $20 $20 Overall, was Meale's strategy successful in 2012? No, because the selling price per unit decreased. Yes, because operating income increased. Yes, because less direct materials were used. No, because more units were produced and sold.

Answer 1

Computation of operating income for 2011 & 2012
Particulars	2011	2012
Unit sold	$                            10,000.00	$                              11,000.00
Selling price per unit	$100	$95
Sales	$                      10,00,000.00	$                        10,45,000.00
less: materials (30000*10), (29000*11)	$                       -3,00,000.00	$                         -3,19,000.00
Conversion cost	$                       -2,50,000.00	$                         -2,40,000.00
Operating income	$                         4,50,000.00	$                           4,86,000.00
Meale's starategy successful in 2012 "YES" because operating income increased in 2012
* it is assumed that conversion cost given is the cost actually incurred