Question

Diego Company manufactures one product that is sold for $73 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 44,000 units and sold 39,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	23
Direct labor	$	16
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	748,000
Fixed selling and administrative expense	$	400,000
The company sold 29,000 units in the East region and 10,000 units in the West region. It determined that $180,000 of its fixed selling and administrative expense is traceable to the West region, $130,000 is traceable to the East region, and the remaining $90,000 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 39,000 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 39,000 units? You do not need to perform any calculations to answer this question.

15. Assume the West region invests $34,000 in a new advertising campaign in Year 2 that increases its unit sales by 20%. If all else remains constant, what would be the profit impact of pursuing the advertising campaign?

Answer 1

Selling price per unit	73
Less: Variable expense
Direct materials	23
Direct labor	16
Variable manufacturing overhead	2
Variable selling and administrative	4
Total Variable expense	45
Contribution margin per unit	28
9
Total fixed costs	1148000	=748000+400000
/Contribution margin per unit	28
Break-even point in unit sales	41000
10
Total Contribution margin	1092000	=39000*28
Less: Total fixed costs	1148000
Net operating loss	(56000)
11
Net operating loss	(56000)
15
Increase in unit sales	2000	=10000*20%
X Contribution margin per unit	28
Increase in Contribution margin	56000
Less: Advertising costs	-34000
Net change in Profits	22000
Profits will increase by 22000