Buscemi Company makes its single product, XY, using highly automated procedures that require little direct labor. The product XY results from processing component XX. Conversion costs include direct labor and all manufacturing costs except those for direct materials (the costs of XX). Conversion costs are deemed to be fixed because they are constant regardless of the number of components processed. They can be changed only by changing capacity. Marketing, sales, and research and development costs are not significant in comparison with the other costs and therefore are not separately reported.
Total assets and their composition were essentially unchanged during the two periods for which the following information is available:
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Year 1 |
Year 2 |
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Units of XY manufactured and sold (work-in process is zero) |
600,000 |
690,000 |
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Unit sales price of XY |
$40 |
$37 |
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Units of component XX processed |
1,800,000 |
1,740,000 |
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Unit cost of component XX |
$1.20 |
$1.26 |
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Processing capacity (units of component XX) |
2,250,000 |
2,100,000 |
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Conversion cost ÷ units of capacity |
$3.90 |
$3.95 |
What is the change in operating income (OI) from Year 1 to Year 2?
a. $1,977,600
b. $1,530,000
c. $(480,000)
d. $(447,600)
