Strategic analysis of operating income. 30 Balanced scorecard and strategy. Music Master Company manufactures an MP3 player called the Mini. The company sells the player to discount stores throughout the country. This player is significantly less expensive than similar products sold by Music Master’s competitors, but the Mini offers just four gigabytes of space, compared with eight offered by competitor Vantage Manufacturing. Furthermore, the Mini has experienced production problems that have resulted in significant rework costs. Vantage’s model has an excellent reputation for quality, but is considerably more expensive. As a result of the actions taken, quality has significantly improved in 2011 while rework and unit costs of the Mini have decreased. Music Master has reduced manufacturing capacity because capacity is no longer needed to support rework. Music Master has also lowered the Mini’s selling price to gain market share and unit sales have increased. Information about the current period (2011) and last period (2010) follows:
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2010 |
2011 |
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|
Units of Mini produced and sold |
8,000 |
9,000 |
|
|
Selling price |
$45 |
$43 |
|
|
Ounces of direct materials used |
32,000 |
33,000 |
|
|
Direct material cost per ounce |
$3.50 |
$3.50 |
|
|
Manufacturing capacity in units |
12,000 |
11,000 |
|
|
Total conversion costs |
$156,000 |
$143,000 |
|
|
Conversion cost per unit of capacity (row 6 ÷ row 5) |
$13 |
$13 |
|
|
Selling and customer service capacity |
90 customers |
90 customers |
|
|
Total selling and customer service costs |
$45,000 |
$49,500 |
|
|
Selling and customer service capacity cost per customer (row 9 ÷ row 8) |
$500 |
$550 |
Conversion costs in each year depend on production capacity defined in terms of units of Mini that can be produced, not the actual units produced. Selling and customer service costs depend on the number of customers that Music Master can support, not the actual number of customers it serves. Music Master has 70 customers in 2010 and 80 customers in 2011.
1. Calculate operating income of Music Master Company for 2010 and 2011. Required
2. Calculate the growth, price recovery, and productivity components that explain the change in operating income from 2010 to 2011.
3. Comment on your answer in requirement 2. What do these components indicate?