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.

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?

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.

Explanation / Answer

Diego Company (All amounts in $) 5. The Company's Gross Margin under Absorption Costing will be calculated as under : Total Sales =45000 units X $79 per unit 3555000 Direct Materials Cost =45000 units X $29 per unit 1305000 Direct Labour Cost =45000 units X $16 per unit 720000 Variable Manufacturing Overheads =45000 units X $2 per unit 90000 Variable Selling and Administrative Overheads =45000 units X $4 per unit 180000 Fixed Selling and Administrative Overheads attributable to products 430000 2725000 Gross Margin under Absorption Costing 830000 6. The Company's Net Margin under Absorption Costing will be calculated as under : Gross Margin as above 830000 Less : Unallocated Fixed Overheads Selling and Administrative Overheads 86000 Manufacturing Overheads 800000 886000 Net Loss under Absorption Costing -56000 7. The Net Margin under Variable Costing will be worked out as : Sales less Variable Costs =45000 X $28 per unit 1260000 Fixed Selling and Administrative Expenses 86000 Fixed Manufacturing Overheads 800000 886000 Net Margin per Variable Costing 374000 Difference in Net Margins 430000 8. Let us assume the number of units required to breakeven as X Hence, 79X = 51X + $ 1,316,000 Therefore, 28X = $ 1,316,000 or X = 47000 units

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