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 44,000 units and sold 39,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	23
Direct labor	$	16
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	748,000
Fixed selling and administrative expenses	$	400,000

The company sold 29,000 units in the East region and 10,000 units in the West region. It determined that $180,000 of its fixed selling and administrative expenses is traceable to the West region, $130,000 is traceable to the East region, and the remaining $90,000 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.   

5. What is the company’s total gross margin under absorption costing?

6. What is the company’s net operating income (loss) under absorption costing?

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

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

8b. Is it above or below the actual sales volume?

	Above
	Below

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 39,000 units?   

Answer 1

Answer:
5	The total gross margin under absorption costing would be calculated as follows:
	Sales revenue	2847000	($73*39,000)
	Less: Cost of goods sold	2262000	($58*39,000)
	Gross margin	585000
	Where, cost of goods sold is calculated as follows:
		(in $)
	Direct material	23
	Direct labor	16
	Variable manufacturing overhead	2
	Fixed manufacturing overhead	17	($748000/44000)
	Cost of goods sold per unit	58
	Variable selling and administrative cost
	Fixed selling and administrative expenses
6	The net operating income (loss) under absorption costing would be calculated as follows:
	Sales revenue		2847000	($73*39,000)
	Less: Cost of goods sold		2262000	($58*39,000)
	Gross margin		585000
	Less: Selling and administrative cost
	Variable selling and administrative cost	156000		($4*39000)
	Fixed selling and administrative expenses	400000	556000
	Net operating income		29000	($585,000-556,000)