Diego Company manufactures one product that is sold for $70 per unit in two geog

Question

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.

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 36,000 units?

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 36,000 units?

*divisions are irrelevant

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?

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 $10,000 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 6% 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 _____

15. Assume the West region invests $31,000 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 $20 Direct Labor $10 Variable Manufacturing Overhead $2 Variable Selling and Administrative $4 Fixed Costs Per Year:      Fixed Manufacturing Overhead $984,000      Fixed Selling and Administrative Expenses $308,000 Diego Company Income Statement Cost of Goods Sold Selling and Administrative Expenses:

Explanation / Answer

We are supposed to solve 4 subparts when multiple posted
9)Breakeven point= Fixed costs/(sales-variable cost per unit)
=(984000+308000)/(70-20-10-2-4)
=38000
This will not chnage if the sales volume is reveresed since the sales and variable cost same for both the regions
10)If it has produced and sold 36000 units then
sales=36000*70=2520000
Variabel costs=(20+10+2+4)*36000=1296000
Contribution margin=1224000
Fixed costs=984000+308000=1292000
Net income=-68000
11)Absortion costing:
here also it remains same ans it is -68000
12)It would be lower since the units produced is higher than units sold the absorption costing will be lower than variable costing income.

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