Diego Company manufactures one product that is sold for $71 per unit in two geog

Question

Diego Company manufactures one product that is sold for $71 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 54,000 units and sold 49,000 units. Variable costs per unit: Manufacturing: Direct materials $ 22 Direct labor $ 12 Variable manufacturing overhead $ 3 Variable selling and administrative $ 5 Fixed costs per year: Fixed manufacturing overhead $ 864,000 Fixed selling and administrative expenses $ 586,000 The company sold 36,000 units in the East region and 13,000 units in the West region. It determined that $280,000 of its fixed selling and administrative expenses is traceable to the West region, $230,000 is traceable to the East region, and the remaining $76,000 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. Required: 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?

Explanation / Answer

East region West region Total Units produced Per unit 54000 Units sold 36000 13000 49000 Selling price 71 71 71 Selling value 2556000 923000 3479000 Variable costs     Direct material 22 792000 286000 1078000     Direct labor 12 432000 156000 588000      selling & administrative expenses 5 180000 65000 245000 Total variable cost 1404000 507000 1911000 Contribution 1152000 416000 1568000 Fixed cost         Traceable 230000 280000 510000 Region contribution 922000 136000 1058000 Untraceable Fixed cost      Manufacturing overhead 864000      selling & administrative expenses 76000 Total untraceable fixed cost 940000 Net Income 118000 If the units between East and west region are interchaged , the break even point would be East region West region Total Units produced Per unit 54000 Units sold 13000 36000 49000 Selling price 71 71 71 Selling value 923000 2556000 3479000 Variable costs     Direct material 22 286000 792000 1078000     Direct labor 12 156000 432000 588000      selling & administrative expenses 5 65000 180000 245000 Total variable cost 507000 1404000 1911000 Contribution 416000 1152000 1568000 Fixed cost         Traceable 230000 280000 510000 Region contribution 186000 872000 1058000 Untraceable Fixed cost      Manufacturing overhead 864000      selling & administrative expenses 76000 Total untraceable fixed cost 940000 Net Income 118000 Break even point ( unit ) = Total fixed cost / weighted contribution per unit weighted average Selling price = 71 ( as the selling price is same in both regions) Weight average variable cost = ( 22+12+5) = 39 ( as the variable cost is same in both regions) Hence Weighted ontribution per unit = ( 71-39) 32 Total fixed cost    Traceable 510000     Untraceable 940000 Total fixed cost 1450000 Break even point ( units) = 1450000 / 32 = 45312.5 Break even point ( units) ( rounded) 45313

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