BM2021

NAMES: Jerho J. Aba DATE: SCORE:

ACTIVITY
Metro Corporation makes a special-purpose machine called “OM” used in the textile industry. Metro has
designed the OM machine for 20X3 to be distinct from its competitors with a premium price. It has been
regarded as a superior machine. The company presents the following data for the years 20X2 and 20X3.

20X2 20X3
1. Units of OM produced and sold 200 210
2. Selling price P40,000 P42,000
3. Direct materials (kilograms) 300,000 310,000
4. Direct materials cost per kilogram P8 P8.50
5. Manufacturing capacity in units of an OM 250 250
6. Total conversion costs P2,000,000 P2,025,000
7. Conversion costs per unit of capacity P8,000 P8,100
8. Selling and customer-service capacity 100 customers 95 customers
9. Total selling and customer-service costs P1,000,000 P940,500
10. Selling and customer-service capacity cost per customer P10,000 P9,900
11. Design staff 12 12
12. Total design costs P1,200,000 P1,212,000
13. Design costs per employee P100,000 P101,000

Metro produces no defective machines, but it desires to reduce direct materials usage per OM machine in
20X2. Conversion costs in each yeardepending on production capacity defined in terms of OM units that can
be produced, not the actual units of OM produced. Selling and customer-service costs depend on the
number of customers that Metro can support, not the actual number of customers the company serves.
Metro has75 customers in 20X2 and 80 customers in 20X3. At the start of each year, management uses its
discretion to determine the number of design staff for the year. The design staff and costs have no direct
relationshipwith the quantity of OM produced or the number of customers to whom OM is sold.

Requirements (7 items x 10 points):

1. Decide and justify if Metro’s strategy is product differentiation or cost leadership.

In 20X3, Metro Corporation employs a product differentiation strategy. The OM machine stands
out as unique and is widely recognized as superior to competing products. For continued success, Metro
must maintain its product's distinctiveness and sustain its premium pricing.

2. Identify applicable key performance objectives and/or measures for the balanced scorecard of Metro
Corporation. Explain briefly how your cited objectives/measures can affect the financial performance
of the company.

1. Financial Perspective

 Increase Revenue: Measure sales growth rate to guarantee successful differentiation and premium
pricing, resulting in increased revenue.
 Improve Profit Margins: Monitor gross margin percentages in order to decrease expenditures and
increase profitability.

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2. Customer Perspective

 Enhance Customer Satisfaction: Use customer satisfaction scores to encourage repeat purchases and
justify higher costs.
 Increase Market Share: Measure market share to measure competitiveness and increase sales.

3. Internal Business Process Perspective

 Improve Production Efficiency: Monitor direct material consumption per unit to decrease waste and
production costs.
 Maintain High Product Quality: Track failure rates to assure dependability and customer satisfaction,
which supports premium pricing.

4. Learning and Growth Perspective

 Foster Innovation: Count the number of new product features that have been launched to maintain
product supremacy and attract customers.
 Enhance Employee Skills and Satisfaction: Measure staff training hours and satisfaction levels in order to
increase performance and productivity.

3. Calculate the operating income of Metro Corporation in 20X2 and 20X3.

Operation Income 20X2 20X3

Revenue (P40,000 × 200); (P42,000 × 210) P8,000,000 P820,000
Costs
Direct Material Costs (300.000 x P8): (310.000 × P8.50) 2,400,000 2,635,000
Manufacturing Conversion Costs (P8,000 x 250); (P8,100 × 250) 2,000,000 2,025,000
Selling & Customer Service Costs (P10,000 x 100); (P9,900 x 95) 1,000,000 940,500
Design costs (P100,000 × 12); (P101,000 x 12) 1,200,000 1,212,300
Total Costs P6,400,000 P6,812,500
Operating Income P1,400,000 P2,007,500
Change in Operating Income P607,500 - Favorable (F)

4. Compute for the revenue effect and cost effects of the growth component. Assuming that the direct
materials costs that would be required in 20X3 to produce 210 unitsinsteadofthe200 units in 20X2,
assuming the 20X2 input-output relationship continued into 20X3, equal 315,000 kilograms.
Manufacturing, conversion, design, selling, and customer-service costs remain the same.

REVENUE EFFECTS OF GROWTH COMPONENT (QUANTITY FACTOR)

Actual units of output sold this year 210
Less: Actual units of output sold last year 200
Increase 10
Multiply by: Output price last year P40,000
FAVORABLE P400,000

COST EFFECTS OF THE GROWTH COMPONENT

Direct materials costs (315,000-300,000) x P8 P120,000 U
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Manufacturing conversion costs (250-250) x P8,000 0

Selling & customer service costs (100-150) x P25,000 0
Design costs (12-12) x P100,000 0
THE COST EFFECTS OF THE GROWTH COMPONENT P120,000 UNFAVORABLE (U)

In summary, the net increase in operation as a result of the growth component equals:

Revenue effect of growth component P400,000 F

The Cost effect of growth component 120,000 U
Increase in operating due to growth component P280,000 FAVORABLE (F)

5. Solve the revenue effect and cost effects of the price-recovery component.

REVENUE EFFECTS OF PRICE RECOVERY COMPONENT (PRICE FACTOR)

Output price this year P42,000
Less: Output price last year 40,000
Increase in output price 2,000
Multiply by: Actual units of output sold this year 210
FAVORABLE P420,000 FAVORABLE (F)

COST EFFECTS OF PICE RECOVERY COMPONENT

Direct materials costs (P8.50-P8.00) x 315,000 P157,500
Manufacturing conversion costs (P8,100-P8,000) x 250 25,000
Selling & customer service costs (P9,900-P10,000) x 100 (10,000)
Design costs (P101,000-P100,000) x 12 12,000
THE COST EFFECTS OF PRICE RECOVERY COMPONENT P184,500 UNFAVORABLE (U)

In summary, the net increase in operating income as result of the price-recovery component equals:

Revenue effect of price-recovery component P420,000 F

The cost effect of the price-recovery component 184,500 U
Increase in operating income due to growth component P235,500 FAVORABLE (F)

6. Calculate the productivity component that explains the change in operating income from 20X2 and
20X3.

Direct materials costs (310,000 - 300,000) x P8.5 (P85,000) F

Manufacturing conversion costs (250 - 250) x P8,100 OU
Selling & customer service costs (100 -95) x P9,900 (49,500) F
Design costs (12-12) x P101,000 0U
Change in operating income due to productivity component (P134,500) F

7. Provide an analysis of operating income using the provided table. Indicate whether computed
amounts are favorable or unfavorable to the company. Then, briefly explain the impact of Metro’s
change in operating income with its strategy.
Income Revenue and cost Revenue and cost The costef fect of Income

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statement effects of growth effects of price- productivity statement

amounts: 20X2 component: 20X3 recovery component: 20X3 amounts: 20X3
component: 20X3
(1) (2) (3) (4) 1+2+3+4=(5)
Revenues 8,000,000 400,000 F 420,000 F 8,820,000
Costs 6,600,000 120,000 U 184,500 U 92,000 F 6,812,500
Operating Income 1,400,000 280,000 F 235,000 F 92,000 F 2,007,500
Income statement amounts in 20X3 - Income statement amounts in 20X2 =
Change in operating income

Change in operating income = 1,400,000 - 2,007,500 = (607,500) Favorable

Based on the provided information and data, Metro's product differentiation strategy significantly
contributed to the growth in operating income. The company maintained premium pricing due to increased sales,
while higher productivity further boosted operating income. Overall, the results were positive and productive,
with the strategy receiving largely favorable feedback.

Rubric for grading items 1‒2, & 7:

CRITERIA PERFORMANCE INDICATORS POINTS
Content Provided pieces of evidence, supporting
8
details, and factual scenarios
Organization Expressed the points in a clear and logical
2
of ideas arrangement of ideas in the paragraph
TOTAL 10

Rubric for grading items3‒6:

CRITERIA POINTS
Correct accounts and amounts used. 7
Computed final amounts are correct and balanced. 3
TOTAL 10

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