Question

Diego Company manufactures one product that is sold for $78 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 49,000 units and sold 44,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	14
Variable manufacturing overhead	$	4
Variable selling and administrative	$	6
Fixed costs per year:
Fixed manufacturing overhead	$	686,000
Fixed selling and administrative expense	$	510,000

The company sold 32,000 units in the East region and 12,000 units in the West region. It determined that $230,000 of its fixed selling and administrative expense is traceable to the West region, $180,000 is traceable to the East region, and the remaining $100,000 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.

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 (loss) under variable costing?

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

Answer 1

Answer 1.

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $28 + $14 + $4
Unit Product Cost = $46

Answer 2.

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Unit Product Cost = $28 + $14 + $4 + $686,000/49,000
Unit Product Cost = $60

Answer 3.

Variable Cost per unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Selling and Administrative
Variable Cost per unit = $28 + $14 + $4 + $6
Variable Cost per unit = $52

Sales Revenue = Selling Price per unit * Number of units sold
Sales Revenue = $78 * 44,000
Sales Revenue = $3,432,000

Variable Costs = Variable Cost per unit * Number of units sold
Variable Costs = $52 * 44,000
Variable Costs = $2,288,000

Contribution Margin = Sales Revenue - Variable Costs
Contribution Margin = $3,432,000 - $2,288,000
Contribution Margin = $1,144,000

Answer 4.

Fixed Costs = Fixed Manufacturing Overhead + Fixed Selling and Administrative Expense
Fixed Costs = $686,000 + $510,000
Fixed Costs = $1,196,000

Net Operating Income (loss) = Contribution Margin - Fixed Costs
Net Operating Income (loss) = $1,144,000 - $1,196,000
Net Operating Income (loss) = -$52,000

Answer 5.

Cost of Goods Sold = Unit Product Cost * Number of units sold
Cost of Goods Sold = $60 * 44,000
Cost of Goods Sold = $2,640,000

Gross Margin = Sales Revenue - Cost of Goods Sold
Gross Margin = $3,432,000 - $2,640,000
Gross Margin = $792,000