Question

The Foundational 15 [LO6-1, LO6-2, LO6-3, LO6-4, LO6-5]

Diego Company manufactures one product that is sold for $80 per unit in two geographic regions—the East and West regions.

Variable costs per unit: Manufacturing: Direct materials $ 24

Direct labor $ 14

Variable manufacturing overhead $ 2

Fixed costs per year: Fixed manufacturing overhead $ 800,000

Fixed selling and administrative expense $ 496,000

The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expense is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96,000 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.

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question.

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 $50,000 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 $30,000 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?

Answer 1

Ques 11
Absorption costing
Direct materials	$                     24
Direct labor	$                     14
variable manufacturing overhead	$                       2
Fixed manufacturing overhead	$                     23
(800000/35000 units)
Unit product cost	$                     63
Sales (35000*$80)	$       2,800,000
Cost of goods sod(35000*63)	$       2,200,000
Gross margin	$          600,000
Selling & Administrative exp.
(35000*4)+496000	$          636,000
Net income/(loss)	$          (36,000)
Ques 13
	total company	East	west
Sales(80)	$       2,800,000	$ 2,000,000	$ 800,000
Variable expenses(42)	$       1,470,000	$ 1,050,000	$ 420,000
Contribution margin	$       1,330,000	$     950,000	$ 380,000
traceable fixed expenses	$          400,000	$     250,000	$ 150,000
region segment margin	$          930,000	$     700,000	$ 230,000
common fixed expenses not traceable	$          896,000
net operating loss	$             34,000
Explanation
Sales
25000*80	$       2,000,000
10000*80	$          800,000
Variable expenses
25000*42	$       1,050,000
10000*42	$          420,000
common fixed expenses	$          896,000
800000+96000
Ques 14
profit decreases by	$          182,500
Forgone segment margin in the West region	$        (230,000)
Additional contribution margin in East region	$             47,500
Decrease in profits if the West region is dropped	$        (182,500)
950000*0.05	$             47,500
Ques 15
Profit increase by	$             46,000
Additional advertising	$          (30,000)
Additional contribution margin in the West region	$             76,000
Increase in profits	$             46,000
380000*0.2	$             76,000