Diego Company manufactures one product that is sold for $79 per unit in two geog

Question

Diego Company manufactures one product that is sold for $79 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 50,000 units and sold 45,000 units.

The company sold 35,000 units in the East region and 10,000 units in the West region. It determined that $240,000 of its fixed selling and administrative expenses is traceable to the West region, $190,000 is traceable to the East region, and the remaining $86,000 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.

1. What is the unit product cost under variable costing?

2. What is the unit product cost under absorption costing?

3. What is the company’s total contribution margin under variable costing?

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

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

9. Is it above or below the actual sales volume?

10. 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?

11. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 45,000 units?

12. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 45,000 units?

13. 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?

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

15. Diego is considering eliminating the West region because an internally generated report suggests the region’s total gross margin in the first year of operations was $80,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East region's sales will grow by 3% in Year 2. Using the contribution approach for analyzing segment profitability and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 2?

16. Assume the West region invests $40,000 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?

Diego Company manufactures one product that is sold for $79 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 50,000 units and sold 45,000 units.

  Variable costs per unit:      Manufacturing:         Direct materials $ 29            Direct labor $ 16            Variable manufacturing overhead $ 2            Variable selling and administrative $ 4      Fixed costs per year:      Fixed manufacturing overhead $ 800,000         Fixed selling and administrative expenses $ 516,000   

The company sold 35,000 units in the East region and 10,000 units in the West region. It determined that $240,000 of its fixed selling and administrative expenses is traceable to the West region, $190,000 is traceable to the East region, and the remaining $86,000 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.

1. What is the unit product cost under variable costing?

2. What is the unit product cost under absorption costing?

3. What is the company’s total contribution margin under variable costing?

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

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

9. Is it above or below the actual sales volume?

10. 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?

11. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 45,000 units?

12. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 45,000 units?

13. 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?

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

15. Diego is considering eliminating the West region because an internally generated report suggests the region’s total gross margin in the first year of operations was $80,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East region's sales will grow by 3% in Year 2. Using the contribution approach for analyzing segment profitability and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 2?

16. Assume the West region invests $40,000 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?

Explanation / Answer

Answer 1. Calculation of Unit Product Cost Under Variable Costing Particulars Amount Variable Expenses Direct Material                        29 Direct Labor                        16 Manufacturing Overhead                           2 Total per Unit Product Cost                        47 Answer 2. Calculation of Unit Product Cost Under Absorption Costing Particulars Amount Variable Expenses Direct Material                        29 Direct Labor                        16 Manufacturing Overhead                           2 Total Variable Exp. Per Unit                        47 Fixed Manufacturing Overhead ($800000 / 50000 Units)                        16 Total per Unit Product Cost                        63 Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost. Answer 3. Calculation of Total Contribution Margin Under Variable Costing Particulars Regions Total East West Sales In Units 35000 10000 45000 SP per Unit $79 $79 A. Sales in $          2,765,000          790,000          3,555,000 Less: Variable Expenses Direct Material          1,015,000          290,000          1,305,000 Direct Labor              560,000          160,000              720,000 Manufacturing Overhead                70,000            20,000                90,000 Variable Selling & Administration Expenses              140,000            40,000              180,000 B. Total Variable Expenses          1,785,000          510,000          2,295,000 Contribution (A-B)              980,000          280,000          1,260,000 Contribution per Unit                        28                    28                        28 Contribution Margin Ratio (Contribtion / Sales X 100) 35.44% 35.44% 35.44% Answer 4. Calculation of Net Operating Income (Loss) Under Variable Costing Particulars Regions Total East West Sales In Units 35000 10000 45000 SP per Unit $79 $79 A. Sales in $          2,765,000          790,000          3,555,000 Less: Variable Expenses Direct Material          1,015,000          290,000          1,305,000 Direct Labor              560,000          160,000              720,000 Manufacturing Overhead                70,000            20,000                90,000 Variable Selling & Administration Expenses              140,000            40,000              180,000 B. Total Variable Expenses          1,785,000          510,000          2,295,000 Contribution (A-B)              980,000          280,000          1,260,000 Less: Fixed Expenses - Traceable Selling & Administration Expenses              190,000          240,000              430,000 Profit              790,000            40,000              830,000 Less: Fixed Expenses - Non Traceable Manufacturing Overhead              800,000 Selling & Administration Expenses                86,000 Total Non Traceable Fixed Costs                         -                       -                886,000 Net Profit / (Loss)              (56,000) In a question, you can only asks 4 subparts, so I have annswered the first 4 Sub Parts. If you want, answers for other subparts you have to asks the question again to solve it.

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