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 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.

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? You do not need to perform any calculations to answer this question.

11. 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.

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

  

Answer 1

9.Overall Break even point will remain the same = Fixed costs/Contribution Margin per unit

= (1,060,000+557,000)/(70-21-10-2-4)
= 1,617,000/33

= 49,000 units

10. Net operating Income under variable costing = Total Contribution Margin – Fixed costs

= 48000*33 – 1,060,000-557,000

= -$33,000

11.It would be same as variable costing net income = -$33,000

13.

Contribution format Income Statement

	Total Company	East	West
Sales Revenue	3,360,000	2,520,000	840,000
Less: Variable costs	1,776,000	1,332,000	444,000
Contribution Margin	1,584,000	1,188,000	396,000
Less: Traceable Fixed costs	490,000	220,000	270,000
Segment Margin	1,094,000	968,000	126,000
Less: Common Fixed costs	1,127,000
Operating Income	-33,000