Diego Company manufactures one product that is sold for $77 per unit in two geog

Question

Diego Company manufactures one product that is sold for $77 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 59,000 units and sold 54,000 units.

  

  

The company sold 41,000 units in the East region and 13,000 units in the West region. It determined that $330,000 of its fixed selling and administrative expenses is traceable to the West region, $280,000 is traceable to the East region, and the remaining $52,000 is a common fixed cost. 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.

   

  

  Variable costs per unit:      Manufacturing:         Direct materials $ 27             Direct labor $ 10             Variable manufacturing overhead $ 2             Variable selling and administrative $ 3       Fixed costs per year:      Fixed manufacturing overhead $ 1,298,000          Fixed selling and administrative expenses $ 662,000    

Explanation / Answer

Diego Company Amount of difference between the variable costing and absorption costing net operatng income (losses) 1 Calculation of unit product cost Variable costing Absorption costing Direct Material $                              27 $                                  27 Direct Labor $                              10 $                                  10 Variable manufacturing overhead $                                 2 $                                     2 Fixed Manufacturing overhead $                                 - $                                  22 ($ 1,298,000/59,000) Production cost per unit $                              39 $                                  61 2 Income statements: Absorption costing:- Sales (54,000 units x $ 77 per unit) $                    41,58,000 Less: Cost of goods sold: Beginning Inventory 0 Add cost of goods manufactured (59,000 units x $ 61) $                35,99,000 Cost of goods available for sale $                35,99,000 Less ending inventory (5,000 units x 61) $                  3,05,000 $                    32,94,000 Gross Profit $                      8,64,000 Less Selling and administrative expenses Fixed $                  6,62,000 Variable (54,000 units x $ 3) $                  1,62,000 $                      8,24,000 Net Operating Income $                          40,000 Variable Costing:- Sales (54,000 units x $ 77 per unit) $                    41,58,000 Less: Variable cost of goods sold Beginning Inventory $                                 - Add Variable cost of goods manufactured (59,000 units x $ 39) $                23,01,000 Cost of goods available for sale $                23,01,000 Less ending inventory (5,000 units x 39) $                  1,95,000 $                    21,06,000 Gross Contribution Margin $                    20,52,000 Less Variable selling and administrative expenses $                      1,62,000 Contribution Margin $                    18,90,000 Less: Fixed costs: Fixed Manufacturing overhead $                12,98,000 Fixed selling and administrative expenses $                  6,62,000 $                    19,60,000 Net Operating Loss $                        -70,000 3 Difference of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating Income (Loss) $                        -70,000 Fixed Manufacturing overhead cost deferred in inventory under absorption costing ( 5000 units x $ 22) $                      1,10,000 Absorption costing net operating income (loss) $                          40,000

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