5. What is the company’s total gross margin under absorption costing? The Tollow

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5. What is the company’s total gross margin under absorption costing? The Tollowing iniormation appiies to the questions alsplayed beloW. Diego Company manufactures one product that is sold for $70 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 41,000 units and sold 36,000 units. Variable costs per unit: Manufacturing: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative 20 10 2 4 Fixed costs per year: $984,000 Fixed selling and administrative expenses$ 308,000 Fixed manufacturing overhead The company sold 26,000 units in the East region and 10,000 units in the West region. It determined that $150,000 of its fixed selling and administrative expenses is traceable to the West region, $100,000 is traceable to the East region, and the remaining $58,000 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.

Explanation / Answer

The Absorption Costing Unit Product Cost Year 1 Direct Material 20 Direct labour 10 Variable Manufacturing overheads 2 Fixed Manufacturing overheads 24 (984000/41000) Absorption costing unit prroduct cost 56 The Variable costing Unit Product cost Year 1 Direct Material 20 Direct labour 10 Variable Manufacturing overheads 2 Variable costing unit prroduct cost 32 The Absorption Costing Income Statement Year 1 Sales ($36000@$70) $2,520,000 Cost of Goods sold ($36000 units @56) 2016000 Gross Margin $504,000 Selling and distribution expense 452,000 (36000*4+308000) Net operating income 52,000 The Variable Costing Income Statement YEAR 1 Sales 2,520,000 Less: Variable cost    variable cost of goods sold@32 1,152,000    Variable selling expense 144,000 1,296,000 Contribution margin 1,224,000 Fixed expense:    Fixed Manufacturing overheads 984,000    Fixed selling expense 308,000 Net operating Income -68,000 Req 5: Gross Margin under Abosprion costing: $ 504,000 Req 6: Net operating income under Absorption costing: $ 52000 Req 7: Difference in net income unde both the costitngs: Net income under Absorption 52000 Net loss under Variable costing -68000 Difference in net incomes 120000

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