Diego Company manufactures one product that is sold for $80 per unit in two geog

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 40,000 units and sold 35,000 units.

The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expense is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96,000 is a common fixed expense. 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-

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

break-even point-------units

b. Is it above or below the actual unit sales?

2- 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?

break-even point--------units

3- What would have been the company’s variable costing net operating income (loss) if it had produced and sold 35,000 units?

4- What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 35,000 units?

5- 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?

Higher

Lower

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

7-

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?

Profit will_____by_____

8-

Assume the West region invests $30,000 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_____

Variable costs per unit: Manufacturing: Direct materials $ 24 Direct labor $ 14 Variable manufacturing overhead $ 2 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 800,000 Fixed selling and administrative expense $ 496,000 Income Statement Total Compan East West

Explanation / Answer

1-

a. Company’s break-even point in unit sales

= Fixed Costs / (Sales Price per Unit - Variable Costs per Unit*)

= ($ 800,000 + $ 496,000)/ ($ 80 -$ 44)

= $ 1,296,000 / $ 36

=36,000 units

* Variable Costs per Unit = $ 24+ $ 14+ $ 2 + $ 4 = $ 44

b. Is it above or below the actual unit sales?

Answer:

Actual sales = 25,000 units (East Region) + 10,000 units (West Region) = 35,000 units

Break even sales = 36,000 units

Break even sales is above actual sales by 1,000 units.

2- 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?

Answer:

Even if sales volumes in the East and West regions had been reversed, the company’s breakeven point in unit sales remains same.

= Fixed Costs / (Sales Price per Unit - Variable Costs per Unit*)

= ($ 800,000 + $ 496,000)/ ($ 80 -$ 44)

= $ 1,296,000 / $ 36

=36,000 units

* Variable Costs per Unit = $ 24+ $ 14+ $ 2 + $ 4 = $ 44

3- What would have been the company’s variable costing net operating income (loss) if it had produced and sold 35,000 units?

Solution:

Particulars

Amount ($)

Sales (35,000 units X $ 80)

2,800,000

Less: Variable Cost

Direct materials (35,000 units X $ 24)

(840,000)

Direct labor (35,000 units X $ 14)

(490,000)

Variable manufacturing overhead (35,000 units X $ 2)

(70,000)

Variable selling and administrative (35,000 units X $ 4)

(140,000)

Contribution margin

1,260,000

Less: Fixed cost

Fixed manufacturing overhead

(800,000)

Fixed selling and administrative expense

(496,000)

Net Operating Loss

(36,000)

4- What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 35,000 units?

Solution:

Particulars

Amount ($)

Sales (35,000 units X $ 80)

2,800,000

Less: Cost of goods sold

Direct materials (35,000 units X $ 24)

(840,000)

Direct labor (35,000 units X $ 14)

(490,000)

Variable manufacturing overhead (35,000 units X $ 2)

(70,000)

Fixed manufacturing overhead

(800,000)

Gross Profit

600,000

Less: Selling and administrative expense

Variable selling and administrative (35,000 units X $ 4)

(140,000)

Fixed selling and administrative expense

(496,000)

Net Operating Loss

(36,000)

Note: As per answering guidelines I am answering first four questions. For rest of the answers, post questions separately.

Particulars

Amount ($)

Sales (35,000 units X $ 80)

2,800,000

Less: Variable Cost

Direct materials (35,000 units X $ 24)

(840,000)

Direct labor (35,000 units X $ 14)

(490,000)

Variable manufacturing overhead (35,000 units X $ 2)

(70,000)

Variable selling and administrative (35,000 units X $ 4)

(140,000)

Contribution margin

1,260,000

Less: Fixed cost

Fixed manufacturing overhead

(800,000)

Fixed selling and administrative expense

(496,000)

Net Operating Loss

(36,000)

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