Diego Company manufactures one product that is sold for $77 per unit in two geog
ID: 2548946 • Letter: D
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. Variable costs per unit: Manufacturing: Direct materials 27 Direct labor Variable manufacturing overhead Variable selling and administrative 5 Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense 864,000 456,000 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 expense is traceable to the West region, $170,000 is traceable to the East region, and the remaining $66,000 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.Explanation / Answer
Diego Company
East Division –
Sales price per unit
$77
Variable costs -
direct materials
$27
direct labor
$12
variable overhead
$3
variable selling
$5
Total variable costs
$47
Contribution margin
$30
fixed cost
manufacturing overhead
$864,000
selling and administrative overhead
$456,000
total fixed costs
$1,320,000
break-even point in unit sales = fixed cost/contribution margin per unit
break-even point in unit sales = $1,320,000/$30 = 44,000 units
The actual unit sales = unit sales in East region and unit sales in West region
Actual unit sales = 33,000 + 10,000 = 43,000
Break-even unit sales = 44,000
Hence, break-even unit sales are Above the actual sales.
The break-even point in unit sales would remain the same at 44,000 units. The reversal of unit sales of East and West regions does not impact the unit contribution margin and the overall fixed costs. Hence the break-even point in unit sales would be 44,000.
10. determination of the company’s variable costing net operating income (Loss) if it had produced and sold 43,000 units:
Contribution margin income statement for 43,000 units produced and sold
Sales
$77.00
$3,311,000
Variable costs:
Direct materials
$27.00
$1,161,000
Direct labor
$12.00
$516,000
manufacturing overhead
$3.00
$129,000
Selling and administration
$5.00
$215,000
Total variable costs
$47.00
$2,021,000
Contribution margin
$30
$1,290,000
Fixed costs:
Manufacturing overhead
$864,000
Selling and administration
$456,000
Total fixed cost
$1,320,000
Net operating income
($30,000)
11. determination of the company’s absorption costing net operating income or loss if it had produced and sold 43,000 units:
Absorption costing income (loss) statement
Sales
$3,311,000
Less: Cost of good sold:
Direct materials
$1,161,000
Direct labor
$516,000
Manufacturing overhead
$993,000
Cost of goods sold
$2,670,000
Gross margin
$641,000
selling and administration
$671,000
Net operating income (loss)
($30,000)
The company reports a net loss of $30,000 under both the variable costing and absorption costing systems. This net income (loss) remains same under both the methods owing to the absence of beginning and ending inventory.
The variable costing income statement would include all the expenses related to the number of units sold and the entire period costs.
The absorption costing however assigns cost of production of all the entire units sold to the current period sales revenue. The cost of goods sold would include the fixed overhead costs that were deferred in previous year ending inventory. Hence, the absorption costing income would be less than the variable costing income.
13. Contribution margin income statement demonstrating East, West and total sections:
East
West
Total
Sales
$2,541,000
$770,000
$3,311,000
Variable costs
$1,551,000
$470,000
$2,021,000
Contribution margin
$990,000
$300,000
$1,290,000
Traceable fixed cost
$220,000
$170,000
$390,000
segment margin
$770,000
$130,000
$900,000
Common fixed expense not traceable to regions (864,000 + 66,000)
$930,000
net operating loss
($30,000)
14. Contribution margin analysis of eliminating west division:
loss of contribution margin on elimination of West division
($50,000)
additional contribution from East region
$49,500
Decrease in profits on elimination of West region
($500)
Profit will decrease by $500 if West region is eliminated.
Additional contribution from East region = 5% of $990,000 = $49,500
15.
Additional investment in advertisement
($38,000)
additional contribution from increased sales of 20% in West region
$60,000
increase in profits
$22,000
Profit will increase by $22,000
Note -
additional profit in west region = 20% of $300,000 = $60,000
Sales price per unit
$77
Variable costs -
direct materials
$27
direct labor
$12
variable overhead
$3
variable selling
$5
Total variable costs
$47
Contribution margin
$30
fixed cost
manufacturing overhead
$864,000
selling and administrative overhead
$456,000
total fixed costs
$1,320,000
break-even point in unit sales = fixed cost/contribution margin per unit
break-even point in unit sales = $1,320,000/$30 = 44,000 units
- The break-even point in unit sales ABOVE the actual unit sales.
The actual unit sales = unit sales in East region and unit sales in West region
Actual unit sales = 33,000 + 10,000 = 43,000
Break-even unit sales = 44,000
Hence, break-even unit sales are Above the actual sales.
- Determination of the company’s overall break-even point in unit sales Assuming reversal of unit sales of East and West regions:
The break-even point in unit sales would remain the same at 44,000 units. The reversal of unit sales of East and West regions does not impact the unit contribution margin and the overall fixed costs. Hence the break-even point in unit sales would be 44,000.
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