Diego Company manufactures one product that is sold for $78 per unit in two geog
ID: 2557920 • Letter: D
Question
Diego Company manufactures one product that is sold for $78 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 49,000 units and sold 44,000 units.
Variable costs per unit:Manufacturing:Direct materials$28Direct labor$14Variable manufacturing overhead$4Variable selling and administrative$6Fixed costs per year:Fixed manufacturing overhead$686,000Fixed selling and administrative expenses$510,000
The company sold 32,000 units in the East region and 12,000 units in the West region. It determined that $230,000 of its fixed selling and administrative expenses is traceable to the West region, $180,000 is traceable to the East region, and the remaining $100,000 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.
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 $14,000 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?
How much will the profit increase/decrease by?
Assume the West region invests $39,000 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?
How much will the profit increase/decrease by?
Explanation / Answer
If co drop west region then co would save loss of 136000 in year 1 of East and due to increase in sale of east co will earn 173200 instead of 154000
Profit would be increase from 154000 to 173200 = 19200 and co would be saved loss of 136000 in west
profit will increase by 19200 + 136000 = 155200
2. If West region invests $39,000 in a new advertising campaign in Year 2
Loss would be inreased from 136000 to 146200
Profit will decreased = 146200 - 136000 = 10200
If co drop west region then co would save loss of 136000 in year 1 of East and due to increase in sale of east co will earn 173200 instead of 154000
Profit would be increase from 154000 to 173200 = 19200 and co would be saved loss of 136000 in west
profit will increase by 19200 + 136000 = 155200
2. If West region invests $39,000 in a new advertising campaign in Year 2
West West in year 2 Qty 12000 14400 Sale Price 78 78 Sale Value (a) 936000 1123200 Cost of Production/ Unit 60 60 Selling Exp Variable 6 6 Total Variable Cost/ unit 66 66 Total Variable Cost (b) 792000 950400 Contribution 144000 172800 Fixed Selling Cost - Traceable © 230000 230000 Fixed Selling Cost - Common (d) 50000 50000 Extra Advertising cost (e) 0 39000 Total Cost (b+c+d+e) 1072000 1191400 Profit/ loss -136000 -146200Loss would be inreased from 136000 to 146200
Profit will decreased = 146200 - 136000 = 10200
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