What is the change in operating income from 20x3 to 20x4?

ACCOUNTING

Multiple Choice

Following a strategy of product differentiation, Lucas Company makes a high-end Appliance, AP15. Lucas Company presents the following data for the years 20x3 and 20x4:



20x3 20x4

Units of AP15 produced and sold 20,000 21,000

Selling price $200 $220

Direct materials (square feet) 60,000 61,500

Direct materials costs per square foot $20 $22

Manufacturing capacity in units of AP15 25,000 25,000

Total conversion costs $1,000,000 $1,110,000

Conversion costs per unit of capacity $40 $44

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



Lucas Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in 20x4. Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 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. Lucas Company has 46 customers in 20x3 and 50 customers in 20x4. The industry market size for high-end appliances increased 5% from 20x3 to 20x4.



What is the change in operating income from 20x3 to 20x4?

a. $1,440,000 F

b. $1,804,500 F

c. $364,500 F

d. $200,000 F

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