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 expense	$	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 expense is traceable to the West region, $250,000 is traceable to the East region, and the remaining $122,000 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.

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?

13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.

Answer 1

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Diego Company
Ans 13
Variable costing statement	East	West	Total
Sell Price	73.00	73.00	73.00	A
Direct Materials	24.00	24.00	24.00	B
Direct Labor	16.00	16.00	16.00	C
Variable manufacturing overhead	2.00	2.00	2.00	D
Variable selling and admin	3.00	3.00	3.00	E
Total Variable cost	45.00	45.00	45.00	F=B+C+D+E
Contribution per unit	28.00	28.00	28.00	G=A-F
Number of units sold	38,000.00	13,000.00	51,000.00	H
Contribution amount	1,064,000.00	364,000.00	1,428,000.00	I=G*H
Fixed manufacturing overhead			784,000.00	J
Fixed selling and admin			672,000.00	K
Net profit			(28,000.00)	L=I-J-K
Ans 14- If West Division dropped:	East
Number of units sold in Year 1	38,000.00			H
% increase in Year 2	5%			M
Increase in Year 2	1,900.00			N=H*M
Number of units sold in Year 2	39,900.00			O=H+N
Variable costing statement	East
Sell Price	73.00			A
Total Variable cost	45.00			F
Contribution per unit	28.00			G
Number of units sold	39,900.00			O
Contribution amount	1,117,200.00			P=G*O
Fixed manufacturing overhead	784,000.00
Fixed selling and admin	372,000.00	250,000 for East Division and 122,000 is common.
Net profit	(38,800.00)			Q
Impact in Net profit	(10,800.00)	Negative Impact		R=Q-L
Ans 15- If West Division invests:
Number of units sold in Year 1	13,000.00			H
% increase in Year 2	20%			S
Increase in Year 2	2,600.00			T=H*S
Contribution per unit	28.00			G
Increase in Contribution	72,800.00			U=G*T
Less: additional investment	46,000.00			V
Net Increase in Contribution	26,800.00			W=U-V
So profit will increase by $ 26,800.