Diego Company manufactures one product that is sold for $73 per unit in two geog

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 expenses $ 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 expenses is traceable to the West region, $130,000 is traceable to the East region, and the remaining $90,000 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.

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)? Difference of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income (loss) Absorption costing net operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Add: Fixed manufacturing overhead cost released from inventory under absorption costing Deduct: Fixed manufacturing overhead cost deferred in inventory under absorption costing Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing which one? 8. What is the company’s break-even point in unit sales? 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? 11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 39,000 units? 12. 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 or Lower 13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions. Income Statement Total Company East West 0 0 $0

Explanation / Answer

Product Cost Absorption Costing Variable Variable Cost Direct Material 23 23 Direct Labor 16 16 Variable Manufacturing overhead 2 2 Fixed Manufacturing overhead ( 748000/44000) 17 0 Total Product cost 58 41 Income Statement under Absorption costing East Region West region Total Number of units sold 29000 10000 39000 Selling Price 73 73 Sales 2117000 730000 2847000 Less : Cost of goods sold @ 58 1682000 580000 2262000 Gross profit 435000 150000 585000 Less : Variable selling and administrative cost @ 4 per unit 116000 40000 156000 Fixed selling and administrative cost - allocable 130000 180000 310000 Fixed selling and administrative cost - not allocable 90000 Operating Income / ( Loss) 189000 -70000 29000 7) Income Statement under Absorption costing East Region West region Total Number of units sold 29000 10000 39000 Selling Price 73 73 Sales 2117000 730000 2847000 Less : Cost of goods sold @ 41 per unit 1189000 410000 1599000 Gross profit 928000 320000 1248000 Less : Variable selling and administrative cost @ 4 per unit 116000 40000 156000 Fixed Manufacturing overhead 748000 Fixed selling and administrative cost - allocable 130000 180000 310000 Fixed selling and administrative cost - not allocable 90000 Operating Income / ( Loss) 682000 100000 -56000 Profit as per Absorption Method 29000 Loss as per Variable Method -56000 Difference (Loss) -85000 8) Selling price per unit 73 Less : Variable Cost per unit Direct Material 23 Direct Labor 16 Variable Manufacturing overhead 2 Variable selling and administrative expense 4 45 Contribution per unit 28 Fixed Cost fIXED Manufacturing overhead 748000 Fixed selling and administrative expense 400000 1148000 Break even Point ( units) = Fixed Cost / Contribution per unit                                                    = 1148000 / 28                                                    = 41000 units BEP in ($) = 41000 * 73 = 2993000 9) Since the selling price per unit , variable cost per unit and the fixed cost for the company does not change , the BEP for the company will not change even if the sales volume is interchanged between regions 10) Under variable costing if the company produes and sells 39000 units , there wil be no difference in the profit / Loss because fixed manufacturing overhead which is dependent on the number of units produced, does not form part of the product cost under variable costing and the entire fixed manufacturing overhead is deducted from gross profit and this amount is not dependng on the number of units produced and sold 11) Product Cost Absorption Costing Variable Cost Direct Material 23 Direct Labor 16 Variable Manufacturing overhead 2 Fixed Manufacturing overhead ( 748000/39000) 19.18 Total Product cost 60.18 Income Statement under Absorption costing East Region West region Total Number of units sold 29000 10000 39000 Selling Price 73 73 Sales 2117000 730000 2847000 Less : Cost of goods sold @ 60.18 1745220 601800 2347020 Gross profit 371780 128200 499980 Less : Variable selling and administrative cost @ 4 per unit 116000 40000 156000 Fixed selling and administrative cost - allocable 130000 180000 310000 Fixed selling and administrative cost - not allocable 90000 Operating Income / ( Loss) 125780 -91800 -56020 12) If in the 2nd year of operations, the company produces 5000 units ;ess than what it sells , the product cost under absorption would include higher manufacturing overhead per unit Hence COGS would be higher as the number of units sold is higher than goods produced. And under variable costing this difference is not relevant as this cost ids not allocated to COGS , but the entire amount is reduced from the gross profit 13) Segmented Contribution Income Statement East Region West region Total Number of units sold 29000 10000 39000 Selling Price 73 73 Sales 2117000 730000 2847000 Less : Variable Cost per unit @ 45 ( refer point 8 above) 1305000 450000 1755000 Contribution 812000 280000 1092000 Less : Fixed Cost fIXED Manufacturing overhead - unallocated 748000 Fixed selling and administrative expense 130000 180000 310000 Fixed selling and administrative expense - unallocated 90000 Operating Income 682000 100000 -56000

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