Question

Diego Company manufactures one product that is sold for $79 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 50,000 units and sold 45,000 units. Variable costs per unit: Manufacturing: Direct materials $ 29 Direct labor $ 16 Variable manufacturing overhead $ 2 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 800,000 Fixed selling and administrative expense $ 516,000 The company sold 35,000 units in the East region and 10,000 units in the West region. It determined that $240,000 of its fixed selling and administrative expense is traceable to the West region, $190,000 is traceable to the East region, and the remaining $86,000 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.

7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

8. What is the company’s break-even point in unit sales?

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?

Answer 1

7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

Answer:

Difference of Variable Costing and Absorption Costing Net Operating Incomes
Variable cost  Net operating loss	(56,000)
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	80,000
Absorbtion costing net operating Income	24,000

Calculation:

For calculating the amount of the difference between the variable costing and absorption costing net operating incomes, we need to first calculate the variable costing net operating income(loss)

So, that will be:

Sales		3,555,000.00
Variable expenses:
Variable cost of goods sold	2,115,000.00
Variable selling and administrative	180,000.00	2,295,000.00
Contribution margin		1,260,000.00
Fixed expenses:
Fixed manufacturing overhead	800,000.00
Fixed selling and administrative	516,000.00	1,316,000.00
Variable cost  Net operating loss		(56,000.00)

*Sales = 45,000 * 79 = 3,555,000

*Variable cost of goods sold = 45,000 * (29+16+2) = 2,115,000

*Variable selling and administrative = 45,000 *4 = 180,000

The difference between the absorption and variable costing net operating income is:

Manufacturing overhead deferred in inventory = Fixed manufacturing overhead in ending inventory – Fixed manufacturing overhead in beginning inventory = ($5,000 per unit × 16 units) − $0 = $80,000

8. What is the company’s break-even point in unit sales?

Answer:

break-even point in unit sales = 47,000

Calculation:

The profit is calculated by multiplying the contribution margin with the break even units and then deducting the fixed expenses. So here:

The break­even point in units is calculated as :

Profit = Unit Contribution margin × Break even point  − Fixed expenses                      

  $0 = ($79 − $51) × Break even point  − $1,316,000     

$0 = ($28) × Break even point  − $1,316,000                   

$28 x Break even point  = $1,316,000                       

Break even point   = $1,316,000 / $28            

Break even point  = 47,000 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?

Answer:

break-even point in unit sales = 47,000

Calculation:

Here, the break even point will remain the same as which is 47,000 units. This is because the contribution per margin is same even if the unit sold either in east region or the west. And the fixed expenses is also remains same. Hence the break even doesnt change from 47,000 units.