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1) A price-bidding decision for a one-time-only special order includes an analysis of all: 1) _______
A) manufacturing costs
B) cost drivers related to the product
C) direct and indirect variable costs of each function in the value chain
D) fixed manufacturing costs
2) Target pricing: 2) _______
A) is used for short-term pricing decisions
B) is one form of cost-based pricing
C) estimates are based on customers’ perceived value of the product
D) relevant costs are all variable costs
3) Successful reengineering involves: 3) _______
A) cutting across functional lines to focus on the entire business process
B) redefining the roles and responsibilities of employees
C) using information technology
D) All of these answers are correct.
4) All of the following relate to the balanced scorecard’s learning and growth perspective EXCEPT: 4) _______
A) How do we achieve greater employee satisfaction?
B) What new products do we create?
C) How do we provide information systems with updated technology?
D) How will we motivate and empower our employees?
Problem ( 60 Points )
Following a strategy of product differentiation, Ernsting Corporation makes a high-end computer monitor, CM12. Ernsting Corporation presents the following data for the years 20X3 and 20X4:

20X3 20X4
Units of CM12 produced and sold 5,000 5,500
Selling price $400 $440
Direct materials (pounds) 15,000 15,375
Direct materials costs per pound $40 $44
Manufacturing capacity for CM12 (units) 10,000 10,000
Conversion costs $1,000,000 $1,100,000
Conversion costs per unit of capacity $100 $110
Selling and customer-service capacity (customers) 60 58
Total selling and customer-service costs $360,000 $362,500
Selling and customer-service capacity cost per customer $6,000 $6,250
Ernsting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM12 in 20X4. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM12 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 46 customers in 20X3 and 50 customers in 20X4. The industry market size for high-end computer monitors increased 5% from 20X3 to 20X4.
Required:
a. What is the revenue effect of the price-recovery component?
b. What is the cost effect of the price-recovery component?
c. What is the net effect on operating income as a result of the price-recovery component?
d. What is the net effect on operating income as a result of the productivity component?