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Pine Corporation produces a variety of products for industrial purposes. Typically, the markets in which they compete are very competitive. Approximately three years ago, the company's research and development group were able to create a product, the D7R, which was superior to any competitive product. Two years ago, the company priced the D7R at prices that were competitive. As the superiority of the product became apparent, Pine increased the unit selling price in the most recent fiscal year.

Exhibit 1 presents relevant data for the past two fiscal years.

Exhibit One

Revenue and Cost Information

2018 & 2019

2018 2019

Volume of D7R produced and sold 9,000 9,900

Unit selling price $9,000 $9,200

Direct materials used in production (kilograms) 900,000 950,000

Direct material cost per kilogram $15 $18

Manufacturing capacity (units of D7R) 10,000 10,000

Total conversion costs $3,960,000 $4,550,000

Selling and customer-service capacity 300 customers 250 customers

Total selling and customer-service costs $2,000,100 $1,747,250

Number of customers 260 250

Design staff 30 20

Total design costs $3,500,010 $2,400,000

Required:

1. Briefly describe the characteristics of both the value leadership and cost leadership strategies. Which strategy do you believe that Pine Corporation is following? Explain.

2. Calculate the operating income of Pine Corporation for 2018 and 2019.

As well, show the change in income between the two years on a line by line basis.

3. Calculate the growth, price-recovery and productivity components that explain the changes in operating income from 2018 to 2019.

4. Suppose that during 2019, the market for the D7R grew by 9%. All increases in market share are the result of Pine's strategic actions. Calculate how much of the change in operating income is due to industry market-size factor, value leadership and cost leadership. Was Pine successful in implementing its strategy?

5. Management had set a goal for 2019 to reduce material use per unit by 10%. Were they successful in achieving this goal? Provide quantitative support.

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