Question

Trusted Products Company makes a household appliance with model number L800. The goal for 2019 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 L800 units that can be produced. The industry market size for appliances increased 15% from 2018 to 2019. The following additional data are available for 2018 and 2019:
2018 2019 Units of L800 produced and sold 31,000 31,620 Selling price $310 $290 Direct materials (square feet) 98,000 96,500 Direct material costs per square foot $34 $36 Manufacturing capacity for L800 (units) 38,750 37,350 Total conversion costs $1,162,500 $1,120,500 Conversion costs per unit of capacity $30 $30Overall, was Trusted Products's strategy successful in 2018?A) Yes, because total revenues increasedB) No, because operating income decreasedC) No, because direct materials usage per unit increasedD) No, because direct material cost per unit decreased

Answer 1

Answer:

Trusted Products Company

Was Trusted Products Company's strategy successful in 2019?

B) No, because operating income decreased

Explanation:

a) Trusted Products Company's Income Statements for 2018 and 2019:

                                        2018                  2019

Sales                              $9,610,000       $9,169,800

Direct Materials costs  (3,332,000)        (3,474,000)

Conversion Costs         (1,162,500)         (1,120,500)

Operating net income $5,115,500        $4,575,300

b) Sales:

2018 = 31,000 x $310 = $9,610,000

2019 = 31,620 x $290 = $9,169,800

c) Direct Materials Costs:

2018  = 98,000 x $34 = $3,332,000

2019 = 96,500 x $36 = $3,474,000

d) Conversion Costs:

2018 = $1,162,500; per capacity unit = $1,162,500/38,750 = $30

2019 = $1,120,500; per capacity unit = $1,120,500/37,350 = $30

e) Goal for 2019: Reduce direct materials usage per unit.

Direct materials usage per unit:

2018 = 98,000/31,000 = 3.16 square feet

2019 = 96,500/31,620 = 3.05 square feet

f) The goal of a reduction in direct materials usage per unit was achieved, as 2019's usage reduced to 3.05 square feet as against 2018's 3.16 square feet.  However, this did not translate to success because of the reduced selling price and the increased cost of direct materials.  These resulted in reduced net operating income from $5,115,500 in 2018 to $4,575,300 in 2019.