Question 1: Evaluating Strategic Success
Assume that in 2011, Simply Pipes Incorporated changed its processes and trained workers to recognize quality problems and fix them before products are finished and shipped to customers. Quality is now at an acceptable level. Cost per kilogram of materials is about the same as before, but conversion costs are higher and Simply Pipes has raised the selling
price of its core product, the A123 Pipe, to be in line with the market. Sales have increased and returns have decreased. Simply Pipes' managers attribute this to higher quality and a price that is still less than their main competitor, Draino Corporation.
Information related to the A123 pipe for the current and prior periods follows:
2010
2011
Units produced and sold15,00016,500
Units returned850350
Net sales in units14,15016,150
Selling price$18$22
Direct materials (kilograms) used7,5008,250
Direct material cost per kilogram$7$7.50
Manufacturing capacity in units18,00018,000
Total conversion costs$108,000$126,000
Conversion cost per unit of capacity$6$7
Selling and customer-service capacity60 customers60 customers
Total selling and customer-service costs$6,000$6,500
Total selling and customer-service capacity cost per customer$100$108.33
Advertising staff22
Total advertising costs$22,000$26,000
Advertising cost per employee$11,000$13,000
Conversion costs in each year depend on production capacity, defined in terms of A123 units that can be produced, not the actual units produced. Selling and customer- service costs depend on the number of customers Simply Pipes can support, not the actual number of customers it serves. Simply Pipes had 50 customers in 2010 and 60 customers in 2011. At the start of each year, management uses its discretion to determine the number of advertising staff for the year. Advertising staff and costs have no direct relationship with the quantity of A123 units produced and sold or the number of customers who buy A123.
Required:
1. Calculate the operating income of Simply Pipes for 2010 and 2011.
2. Calculate the growth (both revenue and cost effect), price -recovery (both revenue and cost effect), and productivity components that explain the change in operating income from 2010 to 2011.
3. Comment on your answer in requirement 2 above. What do these components indicate?