Question

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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.

  

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

  

The company sold 26,000 units in the East region and 10,000 units in the West region. It determined that $150,000 of its fixed selling and administrative expenses is traceable to the West region, $100,000 is traceable to the East region, and the remaining $58,000 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

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

2. If the sales volume in the east and west regions had been reversed, what would be the company’s overall break-even point in unit sales?

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

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

5. 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?

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

7. 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?

8. 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?

Answer 1