Question

In: Accounting

Diego Company manufactures one product that is sold for $80 per unit. The following information pertains to the company’s first year of operations in which it produced 40,000 units and sold 35,000 units.


Diego Company manufactures one product that is sold for $80 per unit. The following information pertains to the company’s first year of operations in which it produced 40,000 units and sold 35,000 units.


  Variable costs per unit:


     Manufacturing:


        Direct materials$24
        Direct labour$14
        Variable manufacturing overhead$2
        Variable selling and administrative$4
  Fixed costs per year:


     Fixed manufacturing overhead$800,000
     Fixed selling and administrative expenses$496,000


Required:

1. What is the unit product cost under variable costing?

2. What is the unit product cost under absorption costing?

3. What is the company’s total contribution margin under variable costing?

4. What is the company’s net operating income under variable costing?  

5. What is the company’s total gross margin (loss) 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)?

8.

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

2. Is it above or below the actual sales volume?

  • Below

  • Above

9. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 35,000 units?

8. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 35,000 units?

Solutions

Expert Solution

1.

Direct material $24
Direct labor 14
Variable manufacturing overhead 2
Unit product costs $40

2.

Direct material $24
Direct labor 14
Variable manufacturing overhead 2
Fixed manufacturing overhead ($800,000/40,000) 20
Unit product costs $60

3.

Total contribution margin = Sales - Total variable costs

Total contribution margin = $2,800,000(35,000*$80) - 1,540,000(35,000*$44)

Total contribution margin = $1,260,000

4.

Net operating income = Total contribution margin - Total fixed costs

Net operating income = $1,260,000 - $1,296,000

Net operating loss = -$36,000

5.

Sales $2,800,000
Less: Cost of goods sold (35,000*$60) 2,100,000
Gross margin $700,000

6.

Gross margin $700,000
Less: Selling and administrative costs (35,000*$4)+$496,000 636,000
Net operating income $64,000

7. Difference between variable and absorption costing net operating income:

Variable costing net operating income -$36,000
Add: Fixed manufacturing overhead deferred in ending inventory (5,000*$20) 100,000
Absorption costing net operating income $64,000

8.

Break even point in unit sales = Total fixed costs / Contribution margin per unit

Break even point in unit sales = $1,296,000 / $44 = 29,455 units

It is below the actual sales volume.

9.

Variable Costing Income Statement
Sales $2,800,000
Less: Variable costs (35,000*$44) 1,540,000
Contribution margin 1,260,000
Less; Fixed costs 1,296,000
Net operating loss -$36,000

10.

Absorption Costing Income Statement
Sales $2,800,000
Less: Cost of goods sold (35,000*$40)+$800,000 2,200,000
Gross margin 600,000
Less: Selling and administrative costs (35,000*$4)+$496,000 636,000
Net operating loss -$36,000

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