Question

The Foundational 15 [LO6-1, LO6-2, LO6-3, LO6-4, LO6-5]

[The following information applies to the questions displayed below.]

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 expense	$	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 expense is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 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.

What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 48,000 units? You do not need to perform any calculations to answer this question.

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?

• Higher

• Lower

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

Answer 1

	East	West	Total
Sales Revenue	$      25,20,000	$                8,40,000	$         33,60,000
Variable costs
Direct materials	$         7,56,000	$                2,52,000	$         10,08,000
Direct labor	$         3,60,000	$                1,20,000	$           4,80,000
Variable manufacturing overhead	$            72,000	$                   24,000	$               96,000
Variable selling and administrative	$         1,44,000	$                   48,000	$           1,92,000
Total Variable costs	$      13,32,000	$                4,44,000	$         17,76,000
Contribution Margin	$      11,88,000	$                3,96,000	$         15,84,000
Fixed costs per year:
Fixed manufacturing overhead	$         7,95,000	$                2,65,000	$         10,60,000
Fixed selling and administrative expense	$         2,70,000	$                2,20,000	$           4,90,000
Total Fixed costs per year:	$      10,65,000	$                4,85,000	$         15,50,000
Operating income	$         1,23,000	$                 -89,000	$               34,000
Common Fixed Costs			$               67,000
Net Operating Income			$             -33,000

What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 48,000 units?
($33000)

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?
Lower