Assuming that the 2019 relationship between inputs and outputs continued in 2020, the price-recovery component of the change in operating income measures solely the effect of changes in selling price on revenues minus the effect of changes in input prices on costs to produce and sell the 1,150,000 units of CX1 in 2020.
Note that the calculation focuses on revenue changes caused by the decrease in the selling price of CX1 between 2019 ($23) and 2020 ($22).
Chipset’s management accountants calculate the cost effects of price recovery separately for variable costs and for fixed costs, just as they did when calculating the cost effect of growth.
Recall that the direct materials of 3,450,000 square centimeters required to produce 2020 output in 2019 had already been calculated when computing the cost effect of growth (see section Growth Component of Change in Operating Income).
Cost effect of price recovery for fixed costs is as follows:
Recall that the detailed analyses of capacities were presented when computing the cost effect of growth (see section Growth Component of Change in Operating Income).
In summary, the net decrease in operating income attributable to price recovery equals the following:
The table depicts the net decrease in operating income attributable to price recovery. The details of the table are as follows:
1. Revenue effect of price recovery: 1,150,000 dollars U
2. Cost effect of price recovery, direct material costs: 345,000 dollars U
3. Cost effect of price recovery, conversion costs: 262,500 dollars
4. Cost effect of price recovery, total costs: 607,500 dollars U
5. Change in operating income due to price recovery: 1,757,500 dollars U
The price-recovery analysis indicates that, even as the prices of its inputs increased, the selling prices of CX1 decreased and Chipset did not pass on input-price increases to its customers.