Question

Diego Company manufactures one product that is sold for $74 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 45,000 units and sold 40,000 units. Variable costs per unit: Manufacturing: Direct materials $ 24 Direct labor $ 18 Variable manufacturing overhead $ 3 Variable selling and administrative $ 5 Fixed costs per year: Fixed manufacturing overhead $ 585,000 Fixed selling and administrative expense $ 423,000 The company sold 30,000 units in the East region and 10,000 units in the West region. It determined that $190,000 of its fixed selling and administrative expense is traceable to the West region, $140,000 is traceable to the East region, and the remaining $93,000 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.

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

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

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

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

b. Is it above or below the actual unit sales?

Answer 1

5.Gross Margin = Sales – Cost of goods sold

= 40,000*74 – (24+18+3)*40,000+585000*40,000/45000

= $640,000

6.Net Operating Income = Gross Margin – Selling and Administrative Expenses

= 640,000 – 423000 – 5*40,000

= $17,000

7.Difference = Fixed manufacturing overhead*Units in ending Inventory/Units produced

= 585000*5000/45000

= $65,000

8.Break even point in units = Fixed costs/Contribution Margin per unit

= (585000+423000)/(74-24-18-3-5)

= 42,000 units

b.Below