Meale Company makes a household appliance with model number X500. The goal for 2
ID: 2474613 • Letter: M
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
A) What is operating income for 2011?
B) What is operating income for 2012?
Explanation / Answer
FOR 2011 COST OF MATERIAL FOR 10000 UNITS = 30000 * 10 = 300000, CONVERSION COST FOR 10000 UNITS = 10000*20 = 200000 TOTAL COST = 300000 + 200000 = 500000
OPERATING INCOME = SALES - COST = 1000000 - 500000 = 500000.
FOR 2012 COST OF MATERIAL FOR 11000 UNITS = 29000 * 11 = 319000, CONVERSION COST FOR 11000 UNITS = 11000*20 = 200000 TOTAL COST = 319000 + 200000 = 519000
OPERATING INCOME = SALES - COST = 1045000 - 519000 = 526000.