Question

Ch 6f

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.

1. What is the unit product cost under variable costing? and under absorption costing? and What is the company’s total contribution margin under variable costing?

2. What is the company’s net operating income (loss) under variable costing? What is the company’s total gross margin under absorption costing?

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

4. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

Answer 1

1) Unit product cost :

	Variable	Absorption
Direct material	25	25
Direct labour	20	20
Variable manufacturing overhead	2	2
Fixed manufacturing overhead		644000/46000 = 14
Unit product cost	47	61

Total contribution margin under variable costing = (75-47-4)*42000 = 1008000

2) Net operating income under variable costing = 1008000-(644000+388000) = -24000

Total gross margin under absorption costing = (75-61)*42000 = 588000

3) Net operating income under absorption costing = (75-61-4*42000)-388000 = 32000

4) Amount of difference = -24000-32000 = 56000