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.  

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

7. The difference between the net operating income under variable costing and the absorption costing is as follows = $ 85000 ( Absorption=$ 29000, variable= -$56000)

Notes:

Calculation of Net operating Income (Variable Costing)

Particulars	Amount ( $)	Amount ( $)
Sales ( 39000 units * $ 73/unit)		$ 28,47,000
Variable cost of goods sold
Beginning Inventory	$ 0
Production Cost( 44000* $ 41/unit)	$18,04,000
Cost of Goods available for sale	$18,04,000
Ending Inventory( 5000 units* $ 41)	($205,000)	($ 15,99,000)
Gross Contribution Margin		$ 12,48,000
Variable selling and administrative expenses (39000units*$4/unit)		($ 156,000)
Contribution Margin		$ 1092,000
Less: Fixed Costs
Manufacturing overhead	$ 748,000
Selling and administrative expenses	$ 400,000	($ 11,48,000)
Net Operating Loss		($ 56000)

Note:Calculation of closing Inventory

Beginning Inventory	0 units
Units produced during the year	44000 units
Units available for sale	44000 units
Units Sold during the year	39000 units
Ending Inventory	5000 units

Calculation of Net operating Income (Absorption Costing)

Particulars	Amount ( $)	Amount ( $)
Sales ( 39000 units * $ 73/unit)		$ 28,47,000
Cost of goods sold
Beginning Inventory	$ 0
Production Cost( 44000* $ 58/unit)	$ 25,52,000
Cost of Goods available for sale	$ 25,52,000
Ending Inventory( 5000 units* $58)	($ 290,000)	$ 22,62,000
Gross Profit		$ 585,000
Selling and administrative expenses
Variable (39000units*$4/unit)	$ 156,000
Fixed	$ 400,000	($ 556,000)
Net Operating Income		$ 29,000

8 a. Company’s Break even point= Fixed Cost/Contribution per unit

                                                 =$ 11,48,000/$ 28 per unit=41000 units( see note below)

Note:

Variable Cost per unit= (Direct materials+direct labor+variable production overhead+selling overhead) /unit

=$ 23+$16+$2+$ 4=$ 45

Contribution/unit=$ 73-$ 45= $ 28

Total Fixed Cost= $748000+$ 400000=$ 11,48,000

8 b. The Break even point is higher than the actual sales by 2000 units

9.The company's Break Even Point would be the same if the sales in the East and West regions are reversed. This is because the sales price , variable cost per unit are the same for both the regions and the fixed cost for the company as a whole is also the same.

10.

Calculation of Net operating Income (Variable Costing)

Particulars	Amount ( $)	Amount ( $)
Sales ( 39000 units * $ 73/unit)		$ 28,47,000
Variable cost of goods sold
Beginning Inventory	$ 0
Production Cost( 39000* $ 41/unit)	$15,99,000
Cost of Goods available for sale	$15,99,000
Ending Inventory	( $ 0)	($15,99,000)
Gross Contribution Margin		$ 12,48,000
Variable selling and administrative expenses (39000units*$4/unit)		($ 156,000)
Contribution Margin		$ 10,92,000
Less: Fixed Costs
Manufacturing overhead	$ 748,000
Selling and administrative expenses	$ 400,000	($ 11,48,000)
Net Operating Loss		($ 56000)