Diego Company manufactures one product that is sold for $77 per unit in two geog

Question

Diego Company manufactures one product that is sold for $77 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 48,000 units and sold 43,000 units. The company sold 33,000 units in the East region and 10, 000 units in the West region. It determined that $220, 000 of its fixed selling and administrative expenses is traceable to the West region. $170, 000 is traceable to the East region, and the remaining $66,000 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 would have been the company's absorption costing net operating income (loss) if it had produced and sold 43,000 units? Assume the West region invests $38,000 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 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 $50, 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?

Explanation / Answer

1)

West Region East Region Total (a) Sales @ $77 per unit 770000 2541000 3311000 Variable cost: direct material @$27 per unit 270000 891000 1161000 direct labour @$12 per nit 120000 396000 516000 variable manufacturing overhead @3 per unit 30000 99000 129000 variable selling and administrative expense @$5 per unit 50000 165000 215000 (b) Total Variable Cost 470000 1551000 2021000 (c) Traceable Fixed Cost 220000 170000 390000 (d) Fixed manufacturing overhead 864000 (e) Fixed selling & administrative overhead 66000 Total manufacturing cost (b + c + d+e) 3341000 Net Income -30000 Net loss for the company = $30000 2) West Region East Region Total (a) Sales @ $77 per unit 924000 2541000 3465000 Variable cost: direct material @$27 per unit 324000 891000 1215000 direct labour @$12 per nit 144000 396000 540000 variable manufacturing overhead @3 per unit 36000 99000 135000 variable selling and administrative expense @$5 per unit 60000 165000 225000 (b) Total Variable Cost 564000 1551000 2115000 (c) Traceable Fixed Cost (220000+38000) 258000 170000 428000 (d) Fixed manufacturing overhead 864000 (e) Fixed selling & administrative overhead 66000 Total manufacturing cost (b + c + d+e) 3473000 Net Income -8000 Net loss under this option id $8000 Therefore the income will increase by $30000 - $8000 = $22000 3) East Region (a) Sales @ $77 per unit 2668050 Variable cost: direct material @$27 per unit 935550 direct labour @$12 per nit 415800 variable manufacturing overhead @3 per unit 103950 variable selling and administrative expense @$5 per unit 173250 (b) Total Variable Cost 1628550 (c) Contribution Margin (a - c) 1039500 (d) Traceable Fixed Cost 170000 Segment margin (c - d) 869500 Less: Fixed costs (864000+66000) 930000 Net Income -60500 Net loss is $60500 Profit will decrease by $60500 - $30000 = $30500

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