Question

Diego Company manufactures one product that is sold for $77 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 48,000 units and sold 43,000 units. Variable costs per unit: Manufacturing: Direct materials $ 27 Direct labor $ 12 Variable manufacturing overhead $ 3 Variable selling and administrative $ 5 Fixed costs per year: Fixed manufacturing overhead $ 864,000 Fixed selling and administrative expense $ 456,000 The company sold 33,000 units in the East region and 10,000 units in the West region. It determined that $220,000 of its fixed selling and administrative expense is traceable to the West region, $170,000 is traceable to the East region, and the remaining $66,000 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.

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)?

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

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 43,000 units? You do not need to perform any calculations to answer this question.

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 43,000 units? You do not need to perform any calculations to answer this question.

Answer 1

1 computaion of total gross margin under absorption costing.

sales $ 77

total variable cost (manufacturing) $ 42

($ 27+$ 12+$ 3)

so contribution per unit i.e ($ 77-$ 42) $35

total contribution ( units $ 43000*$35) $ 1505000

2.computation of net operating income under absorption costing

contribution as per above statement one i.e $ 1505000

less:fixed manufacturing overhead $ 864000

less:fixed selling and mfg overhead $390000

less:closing inventory i.e $ 3485000*$ 5000/$ $ 363021

$ 1617021

less:variable selling and administrative overhead

$ 5* $43000 $ 215000

so operating loss ( $ 327021 )

3 operating income under marginal costing

all the above working is same only the inventory cost is diffirent because

same is valued on the basis of variable cost.

variable cost is $ 42 *$ 48000 $ 2016000

add:selling and mfg oh $ 390000

add:selling and admin oh $215000

total variable cost $ 2621000

so inventory cost $ 2621000*$5000/*$48000 $ 273021

operating loss under marginal costing is $ 237021

4 break even points in unit sale

selling price per units $ 77

variable cost per unit

( $ 27+$ 12+$3+$5) $47

contribution per unit $30

p/v ratio $ 30/$77 39%

BEP in units fixed cost /contribution per unit

$ 864000+$389000/$ 30 units 41800