Diego Company manufactures one product that is sold for $73 per unit in two geog
ID: 2745414 • Letter: D
Question
Diego Company manufactures one product that is sold for $73 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 56,000 units and sold 51,000 units.
Variable costs per unit:
Manufacturing:
Direct materials
$
24
Direct labor
$
16
Variable manufacturing overhead
$
2
Variable selling and administrative
$
3
Fixed costs per year:
Fixed manufacturing overhead
$
784,000
Fixed selling and administrative expenses
$
672,000
The company sold 38,000 units in the East region and 13,000 units in the West region. It determined that $300,000 of its fixed selling and administrative expenses is traceable to the West region, $250,000 is traceable to the East region, and the remaining $122,000 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.
Required:
1.
What is the unit product cost under variable costing?
2.
What is the unit product cost under absorption costing?
3.
What is the company’s total contribution margin under variable costing?
4.
What is the company’s net operating income (loss) under variable costing?
5.
What is the company’s total gross margin under absorption costing?
6.
What is the company’s net operating income (loss) under absorption costing?
7.
What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
1.
What is the company’s break-even point in unit sales?
2.
Is it above or below the actual sales volume?
Below
Above
9.
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?
10.
What would have been the company’s variable costing net operating income (loss) if it had produced and sold 51,000 units?
11.
What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 51,000 units?
12.
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?
Lower
Higher
13.
Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
14.
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 $79,000 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?
15.
Assume the West region invests $46,000 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 Company manufactures one product that is sold for $73 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 56,000 units and sold 51,000 units.
Explanation / Answer
1. unit product cost under variable costing:-
Direct materials $24
Direct labor $16
Variable manufacturing overhead $2
Unit product cost $ 42
Note:- Variable selling and administrative and Fixed selling and administrative expenses are not considered for unit product cost
Fixed manufacturing overhead is not considered for unit product cost under Variable Costing
2 unit product cost under absorption costing:-
Direct materials $24
Direct labor $16
Variable manufacturing overhead $2
Fixed manufacturing overhead ($784,000 / 56000 units) $14
Unit product cost $ 56
Note:- Variable selling and administrative and Fixed selling and administrative expenses are not considered for unit product cost
3 company’s total contribution margin under variable costing :-
sales (51000 units * $73) $3723000
less: variable cost
cost of goods sold(51000 units *$42) ($2142000)
selling and administrative(51000units*$3) ($153000)
Contribution margin $1428000
4 company’s net operating income (loss) under variable costing :-
Contribution margin $1428000
Less: Fixed cost
manufacturing overhead ($784000)
selling and administrative expenses ($672000)
net operating loss ($ 28000)
5. company’s total gross margin under absorption costing :-
sales(51000 units *$73) $3723000
less: cost of goods sold(51000 units * $56) ($2856000)
Gross margin $867000
6. company’s net operating income (loss) under absorption costing:-
Gross margin $867000
less:selling and administrative
Variable (51000 units *$3) ($153000)
Fixed ($672000)
Net operating Income $42000
7. amount of the difference between the variable costing and absorption costing net operating incomes (losses):-
Net operating Income (Absorption costing) $42000
less:Net operating Income (Variable costing) ($ 28000) loss
Difference 70000
8. 1. company’s break-even point in unit sales :-
Break even sale in units = fixed cost / contribution margin
= (manufacturing overhead+selling and administrative overhead)/ ($73 - $45)
= 784000 +672000 / $28
=1456000 / 28
= 52000 units
Note:- Contribution margin = sales price - variable cost
variable cost :
direct material $24
direct labour $16
variable manufacture overhead $2
variable selling and administrative $3
Total variable cost $45
2. above or below the actual sales volume :-
Above the actual sales volume(51000 units)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.