Purchase Solution

# Changes in operating income.

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Calculate the growth, price-recovery, and productivity components of changes in operating income between 2004 and 2005.
Create schedules for Revenue and Cost Effects of Growth, Revenue and Cost Effects of Price Recovery, Cost Effects of Productivity, and a Strategic Analysis of Profitability.

Originial Data
2004 2005
1 Pieces of clothing purchased and sold 40,000 40,000
2 Average selling price \$60 \$59
3 Average cost per piece of clothing \$40 \$41
4 Selling and customer-service capacity 51,000 43,000
5 Selling and customer-service costs \$357,000 \$296,700
6 Selling and cust svc cap costs per cust \$7.00 \$6.90
9 Purch and admin cap costs per design \$250 \$240

Income Statement
Halsey Company
For the Year Ending December 31, 2005

2004 2005
Revenue 2,400,000 2,360,000

Direct materials costs 1,600,000 1,640,000
Selling and customer-service costs 357,000 296,700
Total costs 2,202,000 2,140,700

Operating Income 198,000 219,300

21,300
Increase in operating income

Revenue and Cost Effects of Growth

Revenue effect of growth 0
Direct materials costs 40,000
Selling and customer service costs 0
Total effect of growth 18,925

Revenue and Cost Effects of Price Recovery

Revenue effect of price recovery -40,000
Direct materials costs 40,000
Selling and customer service costs -5,100
Total effect of price recovery -13,741

Cost Effect of Productivity

Revenue effect of productivity 0
Direct materials costs 0
Selling and customer service costs -308,900
Total effect of price productivity -543,250

Total selling and customer service costs depend on the number of customers that the company has created capacity to support, not the actual number of customers. Total purchasing and administrative costs depend on purchasing and admin capacity that the company has created (in terms of the number of distinct designs that can be purchased and adminstered.) Purchasing and administrative costs do not depend on the actual number of distinct clothing designs purchased. The company purchased 930 designs in 2004 and 820 designs in 2005.

This problem is taken from Cost Accounting, 11th edition, Horngren. Chp 13, problem 13-30.

##### Solution Summary

Calculates the growth, price-recovery, and productivity components of changes in operating income.

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The problem is this:
Calculate the growth, price-recovery, and productivity components of changes in operating income between 2004 and 2005.

Total selling and customer service costs depend on the number of customers that the company has created capacity to support, not the actual number of customers. Total purchasing and administrative costs depend on purchasing and admin capacity that the company has created (in terms of the number of distinct designs that can be purchased and administered.) Purchasing and administrative costs do not depend on the actual number of distinct clothing designs purchased. The company purchased 930 designs in 2004 and 820 designs in 2005.

This problem is taken from Cost Accounting, 11th edition, Horngren. Chp 13, problem 13-30.

2004 2005
1 Pieces of clothing purchased and sold 40,000 40,000
2 Average selling price \$60 \$59
3 Average cost per piece of clothing \$40 \$41
4 Selling and customer-service capacity 51,000 43,000
5 Selling and customer-service costs \$357,000 \$296,700
6 Selling and cust svc cap costs per cust \$7.00 \$6.90
9 Purch and admin cap costs per ...

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