Question

Diego Company manufactures one product that is sold for $75 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 46,000 units and sold 42,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	25
Direct labor	$	20
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	644,000
Fixed selling and administrative expense	$	388,000

The company sold 31,000 units in the East region and 11,000 units in the West region. It determined that $200,000 of its fixed selling and administrative expense is traceable to the West region, $150,000 is traceable to the East region, and the remaining $38,000 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.

3a. What is the company’s total contribution margin under variable costing?

3b. What is the company’s total gross margin under absorption costing?

Answer 1

The total contribution margin and net operating income under variable costing are computed as follows:

Sales		$ 3,150,000
Variable expenses:
Variable cost of goods sold (42,000 units × $47 per unit)	$ 1,974,000
Variable selling and administrative (42,000 units × $4 per unit)	$ 168,000	$ 2,142,000
Contribution margin		$ 1,008,000

The total gross margin and net operating income under absorption costing are computed as follows:

Sales	$ 3,150,000
Cost of goods sold (42,000 units × $61 per unit)	$ 2,562,000
Gross margin	$ 588,000

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