Question

Diego Company manufactures one product that is sold for $70 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 53,000 units and sold 48,000 units.

Variable costs per unit: Manufacturing: Direct materials $ 21 Direct labor $ 10 Variable manufacturing overhead $ 2 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 1,060,000 Fixed selling and administrative expenses $ 557,000  

The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expenses is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 is a common fixed cost. 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.

5. What is the company’s total gross margin under absorption costing? Total gross margin

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

7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)? Difference of variable Costing and Absorption Costing Net Operating Income -Variable Costing Net operating income (loss) -absorption costing net operating income (loss)

8. 1. What is the company’s break-even point in unit sales?

2. Is it above or below the actual sales volume? Above Below

9. If the sales volumes in the East and West regions had been reversed, what would be the company’s overall break-even point in unit sales?

10. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 48,000 units?

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 48,000 units?

12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2?

13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions. Income Statement Total Company East West

14. Diego is considering eliminating the West region because an internally generated report suggests the region’s total gross margin in the first year of operations was $66,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East region's sales will grow by 5% in Year 2. Using the contribution approach for analyzing segment profitability and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 2? Profit will by

15. Assume the West region invests $43,000 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

5) and 6)
Income statement under Absorption Costing
Sales (48000 units x $70)	$3,360,000
Less: COGS ((48000 x (21+10+2+1060000/53000)	$2,544,000
Gross Margin	$816,000	part 5
Less: Selling and administrative(48000 x 4)+$557000	$749,000
Net Income(Loss)	$67,000	part 6
7)
Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Net operating income(loss) under variable costing	-$33,000
Add:Fixed manufacturing overhead costs deferred in inventory under absorption costing (53000-48000) x($1,060,000/53000)	$100,000
Net operating income under absorption costing	$67,000
8)
a)
BEP units = Fixed cost /(selling price - variable cost)
BEP units = (1060000+557000)/($70 - $38)	50,219	units
b)
Its above the actual sales.	above