Question

4-15

Diego Company manufactures one product that is sold for $78 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 49,000 units and sold 44,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	14
Variable manufacturing overhead	$	4
Variable selling and administrative	$	6
Fixed costs per year:
Fixed manufacturing overhead	$	686,000
Fixed selling and administrative expense	$	510,000

The company sold 32,000 units in the East region and 12,000 units in the West region. It determined that $230,000 of its fixed selling and administrative expense is traceable to the West region, $180,000 is traceable to the East region, and the remaining $100,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

Assume the West region invests $39,000 in a new advertising campaign in Year 2 that increases its unit sales by 20%. If all else remains constant, what would be the profit impact of pursuing the advertising campaign

PROFIT WILL ___________________ BY ______

Answer 1

Selling price per unit	78
Less: Variable cost per unit
Direct materials	28
Direct labor	14
Variable manufacturing overhead	4
Variable selling and administrative	6
Total Variable cost per unit	52
Unit Contribution margin	26
Increase in Contribution margin of West	62400	=12000*20%*26
Advertising costs	-39000
Net change in income	23400
Profit will increase by 23400