Question

Diego Company manufactures one product that is sold for $71 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 54,000 units and sold 49,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	22
Direct labor	$	12
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	864,000
Fixed selling and administrative expense	$	586,000

The company sold 36,000 units in the East region and 13,000 units in the West region. It determined that $280,000 of its fixed selling and administrative expense is traceable to the West region, $230,000 is traceable to the East region, and the remaining $76,000 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.

6. What is the company’s net operating income (loss) under absorption costing?

Answer 1

Construct The Absorption Costing Unit Product Cost
				Amount $
Direct Material			22
Direct labour			12
Variable Manufacturing overheads	3
Fixed Manufacturing overheads		16.00	(864000/54000)
Absorption costing unit prroduct cost	53.00
Construct the Absorption Costing Income Statement Under FIFO
				Amount $
Sales				$34,79,000	(49000*71)
Cost of Goods sold			2597000	(49000*53)
Gross Margin			$8,82,000
Selling and distribution expense		8,31,000	(5*49000+586000)
Net operating income		51,000
Net Operating Income under Absorption costing: $ 51,000