Stanmore Corporation makes a special-purpose machine, D4H, used in the textile industry. Stanmore...
Question:
Stanmore Corporation makes a special-purpose machine, D4H, used in the textile industry. Stanmore has designed the D4H machine for 2011 to be distinct from its competitors. It has been generally regarded as a superior machine. Stanmore presents the following data for 2010 and 2011.
| 2010 | 2011 | |
|---|---|---|
| 1. Units of D4H produced and sold | 200 | 210 |
| 2. Selling price | $40,000 | $42,000 |
| 3. Direct materials (kilograms) | 300,000 | 310,000 |
| 4. Direct material cost per kilogram | $8 | $8.50 |
| 5. Manufacturing capacity in units of D4H | 250 | 250 |
| 6. Total conversion costs | $2,000,000 | $2,025,000 |
| 7. Conversion cost per unit of capacity (row 6/row 5) | $8,000 | $8,100 |
| 8. Selling and customer service capacity | 100 customers | 95 customers |
| 9. Total selling and customer-service costs | $1,000,000 | $940,500 |
| 10. Selling and customer-service capacity cost per customer (row 9/row 8) | $10,000 | $9,900 |
Stanmore produces no defective machines, but it wants to reduce direct materials usage per D4H machine in 2011. Conversion costs in each year depend on production capacity defined in terms of D4H units that can be produced, not the actual units produced. Selling and customer service costs depend on the number of customers that Stanmore can support, not the actual number of customers it serves. Stanmore has 75 customers in 2010 and 80 customers in 2011.
Calculate the operating income of Stanmore Corporation in 2010 and 2011.
Operating Income:
The operating income is calculated in the income statement of a company, and it represents the gross income minus operating expenses. It, therefore, excludes any non-operating revenues and expenses like interest received or paid or gains or losses on the sale of assets.
Answer and Explanation: 1
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We must use the actual revenues and expenses provided to find the answer:
| 2010 | 2011 | |
|---|---|---|
| 1. Sales revenue | = $40,000 x 200 = $8,000,000 | = $42,000 x 210... |
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