Complete the definition of strategy.

Strategy specifies how an organization matches its own CAPABILITIES with the OPPORTUNITIES in the
OBJECTIVES.
Questions
Select the five key forces to consider when analyzing an industry.
Bargaining power of customers
Bargaining power of input suppliers
Competitors
Equivalent products
Potential entrants into the market
Match the definitions to the two generic strategies
Cost leadership is an organization's ability to achieve lower costs relative to competitors throug
improvements, elimination of waste, and tight cost control.
Product differentiation is an organization's ability to offer products or services perceived by it
relative to the products or services of its competitors.
What is a customer preference map and why is it useful?
A customer preference map describes how different competitors perform across various product attri
customers, such as price, quality, customer service and product features.
What is reengineering?
Reengineering is the fundamental rethinking and redesign of business processes to achieve improvem
of performance such as cost, quality, service, speed, and customer satisfaction.
What are the four key persepectives in the balanced scorecard?
Financial perspective
Customer perspective
Internal business process prospective
Learning and growth prospective
What is a strategy map?
A strategy map is a diagram that describes how an organization creates value by connecting strateg
Cause-and-effect relationships with each other in the financial, customer, internal business proce
perspectives.
Which of the following describes features of a good balanced scorecard?
It tells the story of a company's strategy by articulating a sequence of cause-and-effect relation
It limits the number of measures to only those that are critical to the implementation of strategy
It helps to communicate the strategy to all members of the organization by translating the strateg
set of understandable and measurable operational targets.
ALL OF THE ABOVE ARE CORRECT
What are three important pitfalls to avoid when implementing a balanced scorecard?
Don't ignore nonfinancial measures when evaluating managers and employees.
Don't use only objective measures in the balanced scorecard.
Don't seek improvements across all the measures all of the time.
Describe three components in doing a strategic analysis of operating income.
Growth component
Price recovery component
Productivity component.
Why might an analyst incorporate the industry-market-size factor and the interrelationships among
productivity components into a strategic analysis of operating income?
An analyst can incorporate other factors such as the growth in the overall market and reductions i
productivity gains into a strategic analysis of operating income. By doing so, the analyst can att
income changes to particular factors of interets. For example, the analyst with combine the operat
strategic price reductions and any resulting growth with the productivity component to evaluate a
Page 1
strategy.
 How does an engineered cost different from a discretionary cost?
Engineered costs result from a cause-and-effect relationship between the cost driver, output, and
used to produce that output.
Questions
Discretionary costs arise from periodic (usually annual) decisions regarding the maximum amount to
measurable cause-and-effect relationship between output and resources used.
An integrated approach configuring processes, products, and people to match costs to the activitie
operating effectively and efficiently in the present and future is called
DOWNSIZING
The quantity of output produced divided by the quantity of an individual input used (e.g., direct
called
The partial-productivity measure
“We are already measuring total factor productivity. Measuring partial productivities would be of
No, total factor productivity and partial productivity measures work best together because the str
weaknesses in the other.
Page 2
 marketplace to accomplis
Questions
gh productivity and effic

ts customers to be superi
ributes desired by
ments in critical measure
gic objectives in explici
ess, and learning and gro
onships.
gy.
gy into a coherent and li
the growth, price-recove
in selling prices resulti
tribute the sources of op
ating income effect of
company's cost leadershi
Page 3
 the (direct or indirect)

o be incurred. There is n
Questions
es that need to be perfor

materials or direct manu

no value.” Do you agree?
trengths of one offset
Page 4
 Ridgecrest Corporation manufactures corrugated cardboard boxes. It competes and plans to grow by s
price and by delivering them to customers quickly after receiving customers' orders. There are man
similar boxes. Ridgecrest believes that continuouslEy13i-m1p6roving its manufacturing processes and hav
to implementing its strategy in 2012.
Requirements
--------------------------------------------------------------------------------------------------
Requirement 1:
COST LEADERSHIP
RIDGECREST PLANS TO GROW BY PRODUCING HIGH-QUALITY BOXES AT A LOW COST DELIVERED TO CUSTOMERS IN A
Requirement 2:
GRAPH
RIDGECREST is on the right, and does NOT cross over other company.
PROBABLY C
Requirement 3:
FINANCIAL PERSPECTIVE
CUSTOMER PERSEPECTIVE
INTERNAL-BUSINESS-PROCESS PERSPECTIVE
LEARNING-AND-GROWTH PERSPECTIVE.
Page 5
 selling high-quality boxes at a low
any other manufactures who produce
ving satisfied employees are critical
E13-16
-------------------------------------

A TIMELY MANNER.
Page 6
Roberto & Sons buys T-shirts in bulk, applies its own trendsetting silk-screen designs, and then sell
retailers. Roberto wants to be known for its trendsetting designs, and it wants every teenager to be
Roberto presents the following data for its first tEw1o3-y1e8ars of operations, 2010 and 2011.
NO CALCULATIONS NEEDED
Administrative costs depend on the number of customers that Roberto has created capacity to support,
customers served. Roberto had 3600 customers in 2010 and 3500 customers in 2011.
-----------------------------------------------------------------------------------------------------
Requirement 1. Is Roberto's strategy one of product differentiation or cost leadership? Explain.
PRODUCT DIFFERENTIATION
DISTINCT FROM
SUPERIOR TO
DIFFERENTIATE ITS PRODUCT AND CHARGE A PREMIUM PRICE
Requirement 2: Describe briefly the key measures Roberto should include in its balanced scorecard and
Financial Perspective
INCREASE IN OPERATING INCOME FROM PRODUCTIVITY GAIN
PRICE PREMIUM EARNNED ON PRODUCTS
PRODUCT DIFFERENTIATION
Customer Perspective
CUSTOMER SATISFACTION RATINGS
MARKET SHARE IN INDUSTRY
NUMBER OF NEW CUSTOMERS
NUMBER OF TIMES THE T-SHIRTS ARE MENTIONED IN THE LEADNIG FASHION MAGAZINES
RESULTS IN IMPROVEMENTS IN
Internal-Business-Process Perspective
QUALITY OF SILK-SCREENING (NUMBER OF COLORS, USE OF GLITTER DESIGN)
NEW DESIGN FREQUENCY
TIME BETWEEN CONCEPT AND DELIVERY OF DESIGN
MORE DISTINCTIVE PRODUCTS
Learning-and-Growth Perspective
ABILITY TO ATTRACT AND RETAIN TALENTED DESIGNERS
EMPLOYEE EDUCATION AND SKILLS LEVEL
EMPLOYEE SATISFACTION
IMPROVEMENTS IN SILK-SCREENING PROCESS
DISTINCTIVE
INTERNAL BUSINESS PROCESSES
CUSTOMER SATISFACTION AND FINANCIAL PERFORMANCE
Page 7
ls the T-shirts to a
seen in a distinctiv
E13-18
not on the actual nu

---------------------
nd the reasons it
Page 8
Stanmore Corporation makes a special-purpose machine, D4H, used in the textile industry. Stanmore has d
For 2011 to be distinct from its competitors. It has been generally regarded as a superior machine. Sta
For 2010 and 2011.
E13-22
NO CALCULATIONS NEEDED
Stanmore produces no defective machines, but it wants to reduce direct materials usage per D4H machine
in each year depend on production capacity defined in terms of D4H units that can be prodced, not the a
and customer-service costs depend on the number of customers that Stanmore can support, not the actual
serves. Stanmore has 75 customers in 2010 and 80 customers in 2011.
-------------------------------------------------------------------------------------------------------

Requirement 1: Is Stanmore's strategy one of product differentiation or cost leadership? Explain

PRODUCT DIFFERENTIATION
DISTINCT FROM
SUPERIOR TO
DIFFERENTIATE ITS PRODUCT AND CHARGE A PREMIUM PRICE
Requirement 2: Describe briefly key elements that you would include in Stanmore's balanced scorecard an
Financial Perspective
INCREASE IN OPERATING INCOME FROM CHARGING HIGHER MARGINS
PRICE PREMIUM EARNED ON PRODUCTS
CHARGE PREMIUM PRICES
PRODUCT DIFFERENTIATION
Customer Perspective
CUSTOMER SATISFACTION RATINGS
MARKET SHARE IN INDUSTRY
NUMBER OF NEW CUSTOMERS
RESULTS IN IMPROVEMENTS IN
Internal-Business-Process Perspective
MANUFACTURING QUALITY
NEW PRODUCT FEATURES ADDED
ORDER DERLIVERY TIME
MORE DISTINCTIVE PRODUCTS
Learning and Growth Perspective
DEVELOPMENT TIME FOR DESIGNING NEW MACHINES
EMPLOYEE EDUCATING AND SKILLS LEVEL
EMPLOYEE SATISFACTION
DISTINCTIVE
INTERNAL BUSINESS PROCESSES
CUSTOMER SATISFACTION AND FINANCIAL PERFORMANCE
Page 9
 designed the D4H mach
tanmore presents the f
E13-22
e in 2011. Conversion
actual units produced
l number of customers
----------------------
and the reasons for do
Page 10
Following is an alphabetical listing of perspectives, strategic objectives, and performance measures for

Requirement P13-34
For each perspective, select those strategic objectives from the list that best relate to it. For each st
appropriate performance measure(s) from the list.
---------------------------------------------------------------------------------------------------------
Persective
Financial
Strategy Objectives
INCREASE PROFIT GENERATED BY EACH SALES PERSON
INCREASE SHAREHOLDER VALUE
Performance Measures
PROFIT PER SALES PERS
EARNINGS PER SHARE
NET INCOME
RETURN ON ASSETS
RETURN ON SALES
RETURN ON EQUITY
PRODUCT COST PER UNIT
CUSTOMER COST PER UNI
Perspective
Customer
Strategic Objectives
ACQUIRE NEW CUSTOMERS
RETAIN CUSTOMERS
Performance Measures
NUMBER OF NEW CUSTOME
PERCENTAGE OF CUSTOME
CUSTOMER PROFITABILIT
DEVELOP PROFITABLE CUSTOMERS
Perspective
Internal Business
Process
Strategic Objectives
IMPROVE MANUFACTURING QUALITY
INTRODUCE NEW PRODUCTS
MINIMUZE INVOICE-ERROR RATE
ON-TIME DELIVERY BY SUPPLIERS
INCREASE PROPRIETARY PRODUCTS
Performance Measures
PERCENTAGE OF DEFECTI
NUMBER OF NEW PRODUCT
PERCENTAGE OF ERROR-F
PERCENTAGE OF ON-TIME
NUMBER OF PATENTS
Perspective
Learning and
Growth
Strategic Objectives
INCREASE INFORMATION-SYSTEM CAPABILITIES
ENHANCE EMPLOYEE SKILLS
Performance Measures
PERCENTAGE OF PROCESS
EMPLOYEE TURNOVER RAT
AVERAGE JOB-RELATING
Page 11
 the balanced scorecard.

trategic objective, select the most

------------------------------------------

SON
P13-34
T
IT
ERS
ERS RETAINED
TY
IVE-PRODUCT UNITS
TS
FREE INVOICES
E DELIVERIES BY SUPPLIERS
SES WITH REAL-TIME FEEDBACK
TE
TRAINING HOURS PER EMPLOYEE
Page 12
 Caltex, Inc., refines gasoline and sells it through its own Caltex Gas Stations. On the basis of ma
60% of the overall gasoline market consists of “service-oriented customers,” medium- to high-income
a higher price for gas if the gas stations can provPi1d3e-3e5xcellent customer service, such as a clean
employees, a quick turnaround, the ability to pay by credit card, and high-octane premium gasoline.
market are “price shoppers” who look to buy the cheapest gasoline available. Caltex's strategy is t
Service-oriented customers. Caltex's balanced scorecard for 2012 follows. For brevity, the initiati
omitted.
NO CALCULATIONS NEEDED
Requirement 1
THE SCORECARD FOCUSES ON "SERVICE-ORIENTED CUSTOMERS" BY MEASURING PROCESS IMPROVEMENTS, QUALITY, M
FINANCIAL SUCCESS FROM PRODUCT DIFFERENTIATION AND CHARGING HIGHER PRICES FOR CUSTOMER SERVICE
BASED ON THE SCORECARD, IT APPEARS THAT CALTREX ACHIEVED ALL TARGETS IN FINANCIAL, INTERAL BUSINESS
PERSPECTIVES, EVEN THOUGH IT MISSED THE MARKET SHARE TARGET
Requirement 2
SHOULD
PRODUCT DIFFERENTIATION
VERY IMPORTANT
VALUABLE INTERACTIONS WITH
SUCCEED
Requirement 3
PAY A HIGHER PRICE FOR GASOLINE AND GREAT CUSTOMER SERVICE
SERVICE-ORIENTED CUSTOMER,''
PRICE-SHOPPER
DECLINES
Requirement 4
IS
REFINERY OPERATIONS
GAS STATION OPERATONS
GAS STATION
RANDOM AUDITS
CLEANLINESS OF THE FACILITY AND TURNAROUND TIME AT THE GAS PUMPS
CUSTOMER SATISFACTION AND MARKET SHARE
Requirement 5
AGREE
CALTREX'S STRATEGY IS TO GROW BY CHARGING PREMIUM PRICES FOR CUSTOMER SERVICE, FOCUSEING ON THE 60%
CUSTOMERS
THE SCORECARD MEASURES FOCUS ON CALTREX'S SUCCESS IN IMPLEMENTING THIS STRATEGY INTO A SET OF PERFO
ARE NOT ALWAYS RELATED TO THE EFFECTS ON OPERATING INCOME
Page 13
 market research, Caltex determines that
e individuals who are willing to
n facility, a convenience store, friendly
e. The remaining 40% of the overall
to focus on the 60% of
P13-35
tives taken under each objective are
MARKET SHARE, AND
SS, AND LEARNING AND GROWTH
0% OF SERVICE-ORIENTED

FORMANCE MEASURES WHICH

Page 14
 Lee Corporation manufactures various types of color laser printers in a highly automated facility w
laser printers is competitive. The various color laser printers on the market are comparable in ter
that satisfying customers with products of high quaPl1i3t-y36at low costs is key to achieving its target
achieve higher quality and lower costs by improving yields and reducing defects in its manufacturin
and encourage and empower them to take the necessary actions. Currently, a significant amount of Le
products that are defective and cannot be sold. Lee expects that higher yield will reduce the capac
products. Lee does not anticipate that improving manufacturing will automatically lead to lower cos
To reduce fixed costs per unit, Lee could lay off employees and sell equipment, or it could use the
its current products or improved models of its current products.
Lee's balanced scorecard (initiatives omitted) for the just-completed fiscal year 2012 follows:
CALCULATIONS NOT NEEDED
Requirement 1:
UNSUCCESSFUL
LEE DID NOT ACHIEVE ITS TARTETED MARKET AND HAS BEEN UANBLE TO REDUCE FIXED COSTS
BASED ON THE BALANCED SCORECARD, LEE SIGNIFICANTLY MISSED ITS TARGETS IN THE CUSTOMER AND FINANCIAL
Requirement 2
NO, LEE'S SCORECARD DOES NOT PROVIDE ANY EXPLANATION OF WHY THE TRAGET MARKET SHARE WAS UNSUCCESSFU
HOW WELL ITS PRINTERS MATCH UP AGAINST OTHER COLOR LASER PRINTERS ON THE MARKET
Requirement 3:
IMPORTANT
SHOULD
IMPROVING EMPLOYEE RELATED MEASURES
INTERNAL-BUSINESS PROCESS MEASURES, MARKET SHARE, AND FINANCIAL PERFORMANCE
MANUFACTURING QUALITY
FIXED COSTS
PRODUCE AND SELL NEW MODELS
DEVELOP NEW PRODUCTS AT THE SAME TIME THAT IT IS IMPROVING QUALITY
PROGRESS IN NEW PRODUCT DEVELOPMENT
WITHOUT
Requirement 4:
IF LEE ELIMINATES ANY UNUSED CAPACITY, THAT ULTIMATELY GENERATES A DOWNSIZING OF EMPLOYEES
ONLY IMPROVING QUALITY WILL NOT NECESSARILY LEAD TO LOWER COSTS BECAUSE OF FIXED COSTS
MORALE COULD DROP FOR EXISTING EMPLOYEES, IF MANAGEMENT DOWNSIZES PEOPLE WHOSE HARDWORK AND SKILLS
Page 15
 with high fixed costs. The market for
erms of features and price. Lee believes
et profitability. For 2012, Lee plans to
ing operations. Lee will train workers
Lee's capacity is used to produce
P13-36
acity that Lee needs to manufacture
osts because Lee has high fixed costs.
he capacity to produce and sell more of
AL PERSPECTIVES
FUL. IT SHOULD MEASURE
S LED TO IMPOROVED QUALITY
Page 16
 An analysis of Ridgecrest's operating-income changes between
2011 and 2012 shows the following:
E13-17
The industry market size
grow in 2012, input price
reduced the prices of its
Operating income for 2011
Add growth Component
1850000
85000
Requirements
Deduct price-recovery component
Add productivity component
Operating income for 2012
-72000
150000
2013000
1. Was Ridgecrest's gain
cosistent with a cost lea
2. Explain the productivi
represent savings in only
both variable and fixed c
CONSISTENT
150000 GAIN IN PRODUCTIVITY
INCREASED
It measures the change in costs attributable to a change in the quantity and mix of inputs used in
quantity and mix of inputs that would have been used in a previous year to produce the current yea
amount by which operating income increases and costs decrease through the productive use of input
BOTH VARIABLE COSTS AND FIXED COSTS
IMMEDIATELY TRANSLATE
RESULT ONLY
Page 17
 for currugated cardboard boxes d
es did not change, and Ridgecrest
ts boxes.
E13-17
n in operating income in 2012
eadership strategy?
ity component. In general, does i
y variable costs, only fixed cost
costs?
in a year relative to the
ear output. It measures the
t quantities.
Page 18
Rinaldo & Sons buys T-shirts in bulk, applies its own trendsetting silk-screen designs, and then sells the T
retailers. Rinaldo wants to be known for its trendsetting designs, and it wants every teenager to be seen in
Rinaldo presents the following data for its first tEw1o3-y1e9ars of operations, 2010 and 2011.
2010
213060
2011
253000
Number of T-shirts purchased
Number of T-shirts discarded
Number of T-shirts sold (row 1 – row 2)
12060
201000
28
14500
238500
29
Average selling price
Average cost per T-shirt
13
11
Administrative capacity (number of customers)
Administrative costs
Administrative cost per customer (row 7 / row 6)
4300
1419000
330
4050
1377000
340
Administrative costs depend on the number of customers that Rinaldo has created capacity to support, not on
customers served. Rinaldo had 3900 customers in 2010 and 3800 customers in 2011.
------------------------------------------------------------------------------------------------------------

Calculate Rogerio's operating income in both 2010 and 2011

2010
2011
Revenues
5628000
6916500
Costs
Direct material costs
Administrative costs
Total costs
2769780
1419000
4188780
1439220
2783000
1377000
4160000
2756500
Operating income
F

A
E

C
 A
K

I
Revenue effect of growth
1050000
238500

252810

4300
201000

213060

4300
28

13
Cost effect of growth for variable costs
516750
Cost effect of growth for fixed costs
0
330
Revenue effect of growth
Cost effect of growth
Change in operating income due to growth
1050000
516750
533250
L

J
K

I
F

A
Cost effect of price-recovery for variable costs
238500
29
 11
28

13
238500

252810

4300
Cost effect of price-recovery for variable costs
505620
Cost effect of price-recovery for fixed costs
43000
340
330
Revenue effect of price recovery
Cost effect of price recovery
Change in operating income due to price recovery
238500 F
462620 F
701120 F
Page 19
D
M
H
Cost effect of productivity for variable costs
253000
252810
11
2090
 B
A
J
Cost effect of productivity for fixed costs
E13-1895000
4050
4300
340
Change in operating income due to productivity
82910 F
INCREASE
PRODUCT DIFFERENTIATION
CHARGE A PREMIUM PRICE
WAS ABLE TO EARN ADDITIONAL OPERATING INCOME BY IMPROVING ITS PRODUCTIVITY
Page 20
T-shirts to a number o
n a distinctive Rinald
E13-19
the actual number of
----------------------
Page 21
Merrimack Corporation makes a special-purpose machine, D4H, used in the textile industry. Merrimack has de
machine for 2011 to be distinct rom its competitors. It has been generally regarded as a superior machine.
following data for 2010 and 2011.
E13-23
2010
2011
Units of D4H produced and sold
Selling price
Direct materials (kilograms)
Direct material cost per kilogram
Manufacturing capacity in units of D4H
Total conversion costs
Conversion cost per unit of capacity (row 6/row 5)
Seling and customer-service capacity
Total selling and customer-service costs
230
255
36000
315000
7.25
300
2250000
7500
120
1200000
10000
37000
330000
7.75
300
2280000
7600
115
1127000
9800
Selling and customer-service capacity per customer (row 9/ ro
Merrimack produces no defective machines, but it wants to reduce direct materials usage per D4H machine in
in each year depend on production capacity defined in terms of D4H units that can be produced, not the act
and customer-service costs depend on the number of customers that Merrimack can support, not the actual nu
serves. Merrimack has
80 customers in 2010 and
87 customers in 2011.
----------------------------------------------------------------------------------------------------------

Calculate the operating income of Melissa Corporation in 2010 and 2011

2010
2011
Revenues
8280000
9435000
Costs
Direct materials cost
Manufacturing conversion costs
Selling and customer service costs
Total costs
2283750
2250000
1200000
5733750
2546250
2557500
2280000
1127000
5964500
3470500
Operating income
 Requirement 2
F
255
E
230
K
Revenue effect of growth
900000
36000
M
C
G
349239.13
349239
ROUND
315000
7.25
Cost effect of growth for direct material costs
248232.75 ROUND
A
300
120
A
300
120
I
Cost effect of growth for fixed costs
0 Conversion costs
7500
10000
0 Selling and customer service costs
Revenue effect of growth rate
Cost effect of growth rate
Change in operating income due to growth
900000 F
248232.75 U
651767.25 F
ROUND
ROUND
L
K
F
255
Revenue of effect of price-recovery
255000
37000
36000
H
7.75
G
7.25
M
Cost effect of price-recvoery for direct materials
Page 22
349239
174619.5 ROUND
 J
7600
9800
I
A
300
120
Cost effect of price-recovery for fixed costs
30000 conversion costs
7500
10000
E13--2234000 selling and customer-service costs
Revenue effect of price recovery
Cost effect of price recovery
Change in operating income due to price recovery
255000 F
180619.5 U
74380.5 F
D
M
H
Cost effect of productivity for direct material costs
-149102.25
330000
349239
7.75
B
A
J
Cost effect of productivity for fixed costs
300
115
300
120
7600
9800
0
-49000
Change in operating income due to productivity
198102.25 F
INCREASE
PRODUCTION DIFFERENTIATION
CHARGE A PREMIUM PRICE
WAS ABLE TO EARN ADDITIONAL OPERATING INCOME BY IMPROVING ITS PRODUCTIVITY
Page 23
 esigned the D4H
. Merrimack presents t
E13-23
n 2011. Conversion cos
tual units produced. S
umber of customers it
----------------------
Page 24
Meredith Corporation makes a special-purpose machine, D4H, used in the textile industry. Meredith
For 2011 to be distinct from its competitors. It has been generally regarded as a superior machine
For 2010 and 2011.
E13-24
2010
2011
Units of D4H produced and sold
Selling price
260
280
36000
280000
7
38000
290000
8
Direct materials (kilograms)
Direct material cost per kilogram
Manufacturing capacity in units of D4H
Total conversion costs
290
290
2175000
7500
2233000
7700
Conversion cost per unit of capacity (row 6/row 5)
Selling and customer-service capacity
Total selling and customer-service costs
120
115
1200000
10000
1127000
9800
Selling and customer-service capacity per customer (row 9/row
The company has chosen a product differentiation strategy. The growth, price-recovery and producti
operating income from 2010 to 2011 are as follows:
Revenue effect on growth
720000 F
150766 U
569234 F
Cost effect of growth
Change in operating income due to growth
Revenue effect of price recovery
560000 F
335538 U
224462 F
Cost effect of price recovery
Change in operating income due to price recovery
Change in operating income due to productivity
141304 F
Suppose that during 2011, the market for Meredith's special-purpose machines grew by
5.00%
sales increases greater than 5.00% are the result of Meredith's strategic actions.
--------------------------------------------------------------------------------------------------
Requirement 1:
Unit Increase
Change in operating income
Growth Component x (From Market size / Total Unit increase) =due to industry-market size
569234
13
20
370002.1 F
370002 ROUND THIS FR
Unit Increase
Growth in market share
Growth Component x (From Market size / Total Unit increase) =due to product differentiation
569234
7
20
 199231.9 F
199232 ROUND THIS FR
Growth in market share due to product differentiation
Revenue effect of price recovery
199232 F
560000 F
335538 U
423694 F
Cost effect of price recovery
Change in operating income due to product differentiation
Change in operating income due to cost leadership
141304 F
Change in operating income due to industry-market-size
370002 F
423694 F
141304 F
935000 F
Change in operating income due to product differentiation
Change in operating income due to cost leadership
Page 25
Total change in operating income
 45.3148663 %
ROUND TO NEAREST PERCENT
E13-24
Page 26
 h has designed the D4H machine
ne. Meredith presents the following data
E13-24
tivity components of the change in
. All increases in market share (that is,

--------------------------------------------
FROM ABOVE OR IT IS WRONG
FROM ABOVE OR IT IS WRONG
Page 27
Rinaldo & Sons buys T-shirts in bulk, applies its own trendsetting silk-screen designs, and then sells the T
retailers. Rinaldo wants to be known for its trendsetting designs, and it wants every teenager to be seen in
Rinaldo presents the following data for its first tEw1o3-y2e1ars of operations, 2010 and 2011.
2010
203000
2011
251000
Number of T-shirts purchased
Number of T-shirts discarded
Number of T-shirts sold (row 1 – row 2)
3000
200000
26
4000
247000
27
Average selling price
Average cost per T-shirt
11
9
Administrative capacity (number of customers)
Adminstrative costs
4100
3850
1232000
320
1271000
310
Administrative cost per customer (row 7/row 6)
Administrative cost depend on the number of customers that Rinaldo has created capacity to support, not on t
customers served. Rinaldo had

Requirement 1
3700 customers in 2010 and
3600 customers in 2011.
Administrative cost per customer
320
x
Amount of unused capacity =
500
Cost of unused capacity
160000
Requirement 2
150 increments

x
Numbers of units reduced
150
Administrative cost per customer = Maximum costs saved by
320
48000
RAIMUNDO SHOULD CONSIDER WHETHER SALES INCREASES IN THE FUTURE WOULD LEAD TO A GREATER DEMAND FOR AND UTILIZ
AS NEW CUSTOMERS ARE DRAWN TO RAIMUNDO'S DISTINCTIVE PRODUCTS, CUSTOMER SERVICE MAY BE THE KEY TO NUEW CUSTO
AND FURTHER GROWTH
RAIMUNDO SHOULD REALIZE THE MARKET FEEDBACK OFTENPROVIDED BY CUSTOMER SERVICE STAFF IS PROBABLY KEY TO RAIMU
CUTTING EDGE FASHION STRATEGY; SOME OF THIS MAY BE LOST IF ADMINISRATIVE CAPACITY IS CUST BACK
Page 28
 T-shirts to a number of
n a distinctive Rinaldo T-shirt.
E13-21
the actual number of
y
downsizing
ZATION OF CAPACITY
OMER RENETION
UDNO'S
Page 29
Memorial Corporation makes a special-purpose machine, D4H, used in the textile industry. Memorial has desi
For 2011 to be distinct from its competitors. It has been generally regarded as a superior machine. Memori
For 2010 and 2011.
E13-25
2010
2011
Units of D4H produced and sold
Selling price
200
210
40000
300000
8
42000
310000
8.5
Direct materials (kilograms)
Direct material cost per kilogram
Manufacturing capacity in units of D4H
Total conversion costs
250
250
2000000
8000
2025000
8100
Conversion cost per unit of capacity (row 6/row 5)
Selling and customer-service capacity
Total selling and customer-service costs
100
95
1000000
10000
940500
9900
Selling and customer-service capacity per customer (row 9/row
Memorial produces no defective machines, but it wants to reduce direct materials usage per D4H machine in
each year depend on production capacity defined in terms of D4H units that can be produced, not the actual
and customer-service costs depend on the number of customers that Memorial can support, not the actual num
serves. Memoral has
75 custimers in 2010 and
80 customers in 2011.
Requirement 1
Amount of
Cost of
Unused Capacity
Unused Capacity
324000
(a) Manufacturing
40
20
(b) Selling and customer service
198000
Requirement 2
Number of Units Reduced x Conversion costs per capacity = Maximum costs saved by downsizing
0
8100
0
Requirement 3
MELISSA MAY CHOOSE NOT TO DOWNSIZE BECAUSE IT PROJECTS SALES INCREASES THAT WOULD LEAD TO A GREATER DEMAND

MELISSA MAY BE FOCUSED ON PRODUCT DIFFERENTIATION, WHICH IS KEY TO ITS STRATEGY, RATHER THAN ON COST REDUC
MELISSA MAY DECIDED NOT TO DOWNSIZE BECAUSE DOWNSIZING REQUIRES A SIGNIFICANT REDUCTION IN CAPACITY.for ex
MAY HAVE CHOSEN TO DOWNSIZE SOME MORE MANUFACTURING CAPACITY IF IT COULD DO SO IN INCREMENTS OF SAY, 10, R
Page 30
 igned the D4H machine
ial presents the following data
E13-25
2011. Converion costs in
l units produced. Selling
mber of customers it
D FOR AND UTILIZATION OF CAPACITY

CTION
xample, melissa
RATHER THAN 30 UNITS
Page 31
 Gibbs Company manufactures wallets from fabric. In 2011, Gibbs made
Gerhart has capacity to make 3180000 wallets and incurs a cost
2671200 wallets, make fabric use more efficientP,13a-n3d7 reduce capacity.
2520000 wallets usin
9540000 for this capa
Suppose that in 201 Gibbs makes
costs to 9200800
2671200 wallets, use
1669500 yards of fabric, and redu
--------------------------------------------------------------------------------------------------
2012 Direct Materials
Qty of output produced in 2012
2671200
1669500
1.6

0.9
Partial Productivity = Yards of direct materials used in 2012
2012 Conversion Costs
Qty of output produced in 2012
2671200
2968000
Partial productivity = Capacity units in 2012
2011 based on 2012
Qty of output produced in 2012
2671200
3180000
0.84
CC partical productivyt =Capacity units from 2011 to produduce 2012
IMPROVED
THEY MAY SPECIFY BONUS PAYMENTS IF PARTIAL PRODUCTIVITY OF DIRECT MATERIALS INCREASES TO 1.95UNITS
PARTIAL PRODUCTIVITY OF CONVERSION COSTS IMPROVES TO 1.25 UNIT OF OUTPUT PER UNIT OF CAPACITY
AN ADVANTAGE OF PARTIAL PRODUCTIVITY MEASURES IS THAT THEY FOCUS ON A SINGLE INPUT; HENCE, THEY AR
EASY TO UNDERSTAND AT THE OPERATIONS LEVEL
Page 32
 1800000 yards of fabric. In 2011,
pacity. In 2012, Gibbs plans to make
P13-37
uces capacity
2968000 units and
-----------------------------------------------------------------------------------------------
3rd one
2011 based on 2012 Qty of output produced in 2012 2671200
DM Partial productivity Yards of direct materials from 2011 to produce 2012 1908000
TS OF OUTPUT PER YARD AND IF

ARE SIMPLE TO CALCULATE AND

Page 33
 P13-37
1.4
Page 34
 Gable Company manufactures wallets from fabric. In 2011, Gable made
Gerhart has capacity to make 3270000 wallets and incurs a cost 11445000 for this capa
2975700 wallets, make fabric use more efficientP,13a-n3d8 reduce capacity.
2730000 wallets usin
Suppose that in 2012 Gable makes
2975700 wallets, use
1983800 yards of fabric, and redu
4.45
costs to 9635600 . Assume the fabric costs
4.3 per yard in 2012 and
--------------------------------------------------------------------------------------------------
TFP for 2012 =
Qty of output produced in 2012
2975700
using 2012 prices
Costs of inputs used in 2012 based on 2012 prices
18165940
Benchmark
TFP
Qty of output produced in 2012
2975700
Costs of inputs used in 2011 at 2012 output and prices
19320250
INCREASED
6.36363636 %
ROUND TO ONE DECIMAL!
Combines the productivity of all inputs
cannot
Page 35
 1750000 yards of fabric. In 2011,
pacity. In 2012, Gable plans to make
P13-38
uces capacity
2834000 units and
per yard in 2011.
--------------------------------------------------------------------
0.16380655 ROUND 4 PLACES
0.1638
ROUND FROM ABOVE OR WRONG
0.15401975 ROUND 4 places
0.154 ROUND FROM ABOVE OR WRONG
1907500
Page 36