Atwater Case

Question 1

Atwater Incorporated follows a product differentiation strategy in 2010. Atwater offers a wide selection of clothes and top-notch customer service. Atwater’s strategy is to distinguish itself from its competitors and to charge a premium price.

Question 2

Operating Income for each year is as follows:

| 2009 | 2010 |

Revenues ($75 x 60,000; $73.40 x 60,000) | $4,500,000 | $4,404,000 |

Costs | | |

Material Costs ($51 x 60,000; $52 x 60,000) | 3,060,000 | 3,120,000 |

Selling & customer service costs | 594,000 | 494,100 |

Purchasing & admin. costs | 308,750 | 258,300 |

Total Costs | 3,962,750 | 3,872,400 |

Operating Income | $537,250 | $531,600 |

Change in operating income | $5,650 | U |

Question 3

The Growth Component

Revenue effect of growth component= Actual units of output sold in 2010- Actual units of output sold in 2009 x Output price in 2009

= 60,000-60,000 x $75=$0

Cost effect of Growth component=Actual units of input or capacity that would have been used to produce year 2010 output assuming the same input-output relationship that existed in 2009-Actual units of inputs or capacity used to produce 2009 output x Input prices in 2009

Material costs that would be required in 2010 would be the same as that required in 2009 because output is the same between 2009 and 2010. Manufacturing conversion costs and selling and customer-service costs will not change since adequate capacity exists in 2009 to support year 2010 output and customers.

The cost effects of growth component are:

Material costs (60,000 – 60,000) x $75 = $0

Selling & cust.-serv. Costs (72,000 – 72,000) x $8.25 = 0

Purchase & Admin. Costs (950 – 950) x $325 = 0

Cost effect of growth component = $0

The net effect on operating income as a result of the growth component equals:

Revenue effect of growth component...