Diego Company manufactures one product that is sold for $80 per unit in two geog
ID: 2427908 • Letter: D
Question
Diego Company manufactures one product that is sold for $80 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 51,000 units and sold 47,000 units.
The company sold 34,000 units in the East region and 13,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expenses is traceable to the West region, $200,000 is traceable to the East region, and the remaining $30,000 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)?
8-1. What is the company’s break-even point in unit sales?
8-2. Is it above or below the actual sales volume?
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 47,000 units?
11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 47,000 units?
12. If the company produces 4,000 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?
13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
14. 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 $68,000 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 5% 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?
Profit will _____ by _____
15. Assume the West region invests $41,000 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?
Profit will _____ by _____
Diego Company manufactures one product that is sold for $80 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 51,000 units and sold 47,000 units.
Variable costs per unit: Manufacturing: Direct Materials $30 Direct Labor $18 Variable Manufacturing Overhead $2 Variable Selling and Administrative $3 Fixed Costs Per Year: Fixed Manufacturing Overhead $816,000 Fixed Selling and Administrative Expenses $480,000The company sold 34,000 units in the East region and 13,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expenses is traceable to the West region, $200,000 is traceable to the East region, and the remaining $30,000 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)?
Variable Costing Net Operating Income (loss) $ Add: fixed manufacturing overhead cost deferred in inventory under absorbtion costing. Absorbtion Costing Net Operating Income (loss) $8-1. What is the company’s break-even point in unit sales?
8-2. Is it above or below the actual sales volume?
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 47,000 units?
11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 47,000 units?
12. If the company produces 4,000 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?
13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
14. 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 $68,000 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 5% 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?
Profit will _____ by _____
15. Assume the West region invests $41,000 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?
Profit will _____ by _____
Diego Company Income Statement Cost of Goods Sold Selling and Administrative Expenses:Explanation / Answer
The unit product cost under variable costing includes the total manufacturing variable cost per unit calculated as under: The unit product cost under variable costing does not include variable selling and administrative expenses and total fixed cost.
The unit product cost under variable costing:
Particulars
Cost
Direct materials
$ 30
Direct labor
$ 18
Variable manf. Overhead
$ 2
Total unit product per unit
$ 50
2.
The unit product cost under absorption costing includes the total manufacturing variable cost and manufacturing fixed cost per unit calculated as under:
The unit product cost under absorption costing does not include variable and fixed selling and administrative expenses.
The unit product cost under absorption costing:
The unit product cost under absorption costing:
Particulars
Cost
Direct materials
$ 30.00
Direct labor
$ 18.00
Variable manf. Overhead
$ 2.00
Manf. fixed cost per unit
$ 16.00
Total unit product per unit
$ 66.00
3.
The company’s contribution margin per unit under variable costing is the difference between sales and the total variable cost.
Total variable cost per unit is as under:
Particulars
Cost
Direct materials
$ 30.00
Direct labor
$ 18.00
Variable manf. Overhead
$ 2.00
Variable selling and adminstrative exp.
$ 3.00
Total variable cost per unit
$ 53.00
Total contribution margin under variable costing is as under:
Sales (47,000 units @ $80per unit)
$ 3,760,000
Less:
Total variable cost (47,000 units@53 per unit)
$ 2,491,000
Total contribution margin
$ 1,269,000
4.
The net operating income under variable costing is as under:
Particulars
Cost
Sales (47,000 units @ $80per unit)
$ 3,760,000
Less:
Total variable cost (47,000 units@53 per unit)
$ (2,491,000)
Contribution margin
$ 1,269,000
Total fixed cost (Mnf and selling and adminst) ($816,000+$480000)
$ (1,296,000)
Net operating income
$ (27,000)
5.
The company’s gross total margin under absorption costing is calculated as under:
The difference between sales and cost of goods sold is the gross margin. In the absorption costing the product unit cost includes manufacturing variable and fixed overhead cost (it does not include the variable and fixed selling and administrative expenses).
Particulars
Cost
Sales (47,000 units @ $80per unit)
$ 3,760,000
Less:
Cost of goods sold ($47,000@ $66)
$ (3,102,000)
Gross margin
$ 658,000
The company’s net operating income under absorption costing is as under:
Net operating income under absorption costing is the difference between gross margin and total (variable and fixed) selling and administrative expenses.
Particulars
Cost
Gross Margin
$ 658,000
Less:
Variable selling and administrative exp.($47,000@$3)
$ (141,000)
Fixed selling and administrative exp.
$ (480,000)
Net Operating Income
$ 37,000
7.
The amount of difference between net operating income under variable costing and absorption costing is the amount of fixed manufacturing overhead which has been treated as product unit cost.
Variable Costing Net Operating Income (loss)
($27,000)
Add: fixed manufacturing overhead cost deferred in inventory under absorbtion costing. (51,000-47,000)*$16
$64,000
Absorbtion Costing Net Operating Income (loss)
$37,000
8-1.
The company’s break even point in unit sales is calculated by dividing total fixed cost (Manufacturing and selling and administrative exp.) by contribution margin per unit (the difference between selling price per unit and variable cost per unit)
Selling price per unit
$ 80.00
Variable cost per unit
$ 53.00
Contribution margin per unit
$ 27.00
Total fixed cost calculated as under:
Fixed manufacturing overhead
$ 816,000
Fixed selling and adminstrative overhead
$ 480,000
Total fixed cost
$ 1,296,000
The break even sales in units=Total fixed cost/contribution margin per unit
=$1,296,000/$27
=48,000 units
8-2
The sales is 47,000 units during the year which is less than the break even sales in units which is 48,000 units therefore the company has to bear loss..
9.
The total fixed cost does not changes even if the sales of east region and west region reversed, therefore the total break even sales in units will remain in either case.
10.
If the company would have produced and sold 47,000 units then the net operating income under variable costing would be as under:
Particulars
Cost
Sales (47,000 units @ $80per unit)
$ 3,760,000
Less:
Total variable cost (47,000 units@53 per unit)
$ (2,491,000)
Contribution margin
$ 1,269,000
Total fixed cost (Mnf and selling and adminst) ($816,000+$480000)
$ (1,296,000)
Net operating income
$ (27,000)
11.
If the company would have produced and sold 47,000 units then the net operating income under variable costing would be as under:
Particulars
Total
East
West
Unit Sales
47000
34000
13000
Sales @$80
$ 3,760,000
$ 2,720,000
$ 1,040,000
Less:
Manufacturing overhead
Variable Cost @ $53
$ (2,491,000)
$ (1,802,000)
$ (689,000)
Contribution margin
$ 1,269,000
$ 918,000
$ 351,000
Fixed cost
Manf. Cost
$ (816,000)
Selling and admnt.cost
$ (480,000)
$ (200,000)
$ (250,000)
Net operating income
$ (27,000)
12.
If the company produces fewer units of 4,000 than it sells in the second year then the absorbed fixed overhead per unit will be higher. The absorbed fixed overhead cost for ending inventory will be charged in the second year and the net operating income under absorption costing will be lower than the net operating income under variable costing.
13.
Particulars
Total
East
West
Unit Sales
47000
34000
13000
Sales @$80
$ 3,760,000
$ 2,720,000
$ 1,040,000
Less:
Manufacturing overhead
Variable Cost @ $53
$ (2,491,000)
$ (1,802,000)
$ (689,000)
Contribution margin
$ 1,269,000
$ 918,000
$ 351,000
Fixed cost
Manf. Cost
$ (816,000)
Selling and admnt.cost
$ (480,000)
$ (200,000)
$ (250,000)
Net operating income
$ (27,000)
14.
If west region will be eliminated the sales of east region will be increased by 5% (34,000+5%) comes to 35,700 units and the fixed selling and administrative expenses will decrease by $250,000 therefore the total fixed cost remains (Mnf.. and selling) would be $816,000 and $230,000.
Particulars
East
Unit Sales
35700
Sales @$80
$ 2,856,000
Less:
Manufacturing overhead
Variable Cost @ $53
$ (1,892,100)
Contribution margin
$ 963,900
Fixed cost
Manf. Cost
$ (816,000)
Selling and admnt.cost
$ (230,000)
Net operating income
$ (82,100)
The unit product cost under absorption costing:
Particulars
Cost
Direct materials
$ 30.00
Direct labor
$ 18.00
Variable manf. Overhead
$ 2.00
Manf. fixed cost per unit ($816,000/47,000uts)
$ 17.362
Total unit product per unit
$ 67.36
The net operating income under absorption costing is as under:
Particulars
Cost
Sales (47,000 units @ $80per unit)
$ 3,760,000
Less: Cost of goods sold
cost of goods manf. 47,000@$67.362
$ (3,166,014)
Less: Cost of inventory NIL
-
Cost of goods sold
$(3,166,014)
Gross margin
$ 593,986
Less:
Variable selling and adminstrative cost @ $3
$ (141,000)
Fixed selling and administrative cost
$ (480,000)
$ (621,000)
Net Operating income
$ (27,014)
12.
If the company produces fewer units of 4,000 than it sells in the second year then the absorbed fixed overhead per unit will be higher. The absorbed fixed overhead cost for ending inventory will be charged in the second year and the net operating income under absorption costing will be lower than the net operating income under variable costing.
13.
Particulars
Total
East
West
Unit Sales
47000
34000
13000
Sales @$80
$ 3,760,000
$ 2,720,000
$ 1,040,000
Less:
Manufacturing overhead
Variable Cost @ $53
$ (2,491,000)
$ (1,802,000)
$ (689,000)
Contribution margin
$ 1,269,000
$ 918,000
$ 351,000
Fixed cost
Manf. Cost
$ (816,000)
Selling and admnt.cost
$ (480,000)
$ (200,000)
$ (250,000)
Net operating income
$ (27,000)
14.
If west region will be eliminated the sales of east region will be increased by 5% (34,000+5%) comes to 35,700 units and the fixed selling and administrative expenses will decrease by $250,000 therefore the total fixed cost remains (Mnf.. and selling) would be $816,000 and $230,000.
Particulars
East
Unit Sales
35700
Sales @$80
$ 2,856,000
Less:
Manufacturing overhead
Variable Cost @ $53
$ (1,892,100)
Contribution margin
$ 963,900
Fixed cost
Manf. Cost
$ (816,000)
Selling and admnt.cost
$ (230,000)
Net operating income
$ (82,100)
15.
Particulars
Total
Unit Sales
56400
Sales @$80
$ 4,512,000
Less:
Manufacturing overhead
Variable Cost @ $53
$ (2,989,200)
The unit product cost under variable costing:
Particulars
Cost
Direct materials
$ 30
Direct labor
$ 18
Variable manf. Overhead
$ 2
Total unit product per unit
$ 50
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